Crude Observations

An Early Q3 Report Card – Not Pretty

Well, another three months have gone by and it seems that all of the progress we made in the second quarter has been mercilessly unwound by forces both within and outside of our control.


And the result is that my fearless forecast of 2018 appears to have completely upended and sent on its merry way as pipelines got under way and then were stopped, stopped pipelines were suddenly back underway and once left for dead pipelines (no, not Energy East) appear to have been resurrected and suddenly have a schedule.


Production growth continues unabated in the US as well as on a somewhat more muted basis in Canada. Oil prices continue to rise, with the attention now firmly focused on their economy-killing effect… Seriously, talk about a commodity that gets a bad rap – prices too low they kill industries and oil-reliant countries. Prices too high, global growth comes to a shuddering stop. If only we could have maintained our goldilocks position. But, you know, tariffs, trade wars, proxy wars, political instability, Iranian sanctions. All that crap.


OK, enough of this. I am three quarters in, it’s been a great ride. I am fairly sure there are some tragically embarrassing results to see in here, but I am fairly confident I will have a couple of things right. So I am likely still passing.


In all seriousness, how much worse can it get in the next three months? I’m going to live to regret saying that aren’t I?


OK, here goes. Maybe I’ll get a participation trophy?


Broad Themes


One of the bigger themes I had on my radar at the end of last year was civil unrest, in particular in the Middle East and Saudi Arabia but also more broadly across the region.


So far Syria seems to playing along as are the Palestinian territories, but Iran and Saudi Arabia for a while seemed like they were keeping things in check, notwithstanding the various proxy confrontations and the escalation of the Yemen conflict. However, all bets came off when Trump announced he was withdrawing from the nuclear agreement with Iran and put in place stiff new sanctions on Iran. The effect of this is to destabilize the entire region. While it remains to be seen how stiffly sanctions will be enforced, there is little doubt whose “side” the US has chosen in the ongoing struggle for domination in the Middle East.


The proxy war in Yemen continues to fester and recent terrorist activities in Iran targeting the Iranian National Guard have been blamed (by Iran) on Israel and the United States. As the squeeze on Iranian oil exports gets tighter and economic conditions deteriorate further, Iran could be the next domino to fall in the Middle East. At the same time, someone appears to have lit a match in Iraq as well with a central government that appears to be losing control of the fringes.


Meanwhile the oil keeps pumping. Except in Libya. Where one week it is at record highs and the next it’s halved.


Fortunately for Saudi Arabia, the elevated price of oil is allowing the royal family to do what they do best – buy loyalty, so emerging social unrest in the Kingdom is tamped down.


Grade C – still evolving.


The other part of the unrest prediction was with respect to Venezuela. I have been harping on this for more than a year now and it is finally obvious that the wholesale collapse of the Venezuelan oil industry is underway which will take decades to reverse. In the meantime, the population starves and Maduro eats steak. There are rumours the military will take action and that maybe the US will intervene but I don’t feel very sanguine about either of those options. Given the investment in the country and desire for regional stability, you would think that maybe China and the US could come up with some plan, but they ain’t really on speaking terms right now. But money talks. And China needs the oil.


Grade B – can’t get full marks for stating the obvious.




As I have admitted before, I didn’t really understand what I was saying with my blockchain! prediction, but I liked the term and it made me feel intellectual like, so I used it. Blockchain! Artificial Intelligence! Data Acquisition! These are all real things. How do they get used? It’s all about efficiency. From Suncor’s self-driving trucks to walking rigs to the analysis of the terrabytes of data spewing out of a 15,000 ft horizontal frac, it’s all about using technology (Blockchain!) to reduce costs and owning that technology and data.


Grade B – look, it’s happening.


On the energy front my forecast had an evolving story over the course of 2018 centered on a day of reckoning from at least three years of massive underinvestment in non-OPEC, non shale resources.


This took a while but the gyrations in the market over the last two quarters, volatility in Libya, the collapse in Venezuela and the Donald Trump’s Iran sanctions have all brought laser-sharp attention to the issue of the marginal barrel and spare capacity. Hint – there’s not a lot and it’s mostly in Saudi Arabia whose production is set to test unprecedented levels.


Notwithstanding a whole boatload of recent FIDs and project announcements (even a few in Canada!), many of these are years off in terms of completion. So we are in good shape for 2022, but expect a rough ride as we learn how much spare capacity Saudi Arabia really has.


Despite arguments that shale will solve all and give the US energy independence, the evidence is all to the contrary. There is a growing concern regarding crude quality as light tight oil has a limited market and the Permian, as discussed here previously, has a major offtake issue – they need pipelines and this will constrain production growth.  In addition, Mexico, Brazil, Southeast Asia and other key regions are underperforming their asset bases and beginning to show some of the effects of underinvestment. Mexico has become a wildcard with the election of the socialist populist AMLO- what are his real plans for Pemex? Will he reverse the liberalization? That’s what the word on the street is. Oil finds are still at decade lows, notwithstanding some promising developments in Africa and regardless of the amount of capital expended in the Permian, other oil needs to come on stream. Things are tight now, as OECD storage numbers are down significantly. Demand is way up, even for LNG. Prices are reflecting this.


Expect a bumpy winter.


Grade B+  – Emerging


OK, if I’m going to take credit for being right about oil, I need to admit how collossally wrong I was about Donald Trump. I had predicted that 2018 would the year Trump softened and became a more benign figure. He must have read that and said “those Stormont guys are treating me very bad”, because the complete 180 from what I thought is pretty spectacular.


What are we seeing? A very aggressive foreign policy stance with the sanctions on Iran, the ongoing alienation of traditional allies, NATO and otherwise and a bellicose America first speech at the UN General Assembly just this week. On the trade front, we are in the middle of a trade war between China and the US, animosity towards Europe, a subservient Mexico folding to bilateral demands on NAFTA and the sidelining of Canada and our very bad farmers.


As I said last quarter, trade conflicts are like a very aggressive cancer and will spread rapidly with varying unknown consequences, upsetting the benign economic conditions we have been enjoying, raising prices and inflation across the board and potentially stopping global growth in its tracks. But on the other hand, some steel mills in Pennsylvania can reopen so that’s good, right? Anyway, a big swing and a miss on this prediction, but mid-term elections are coming. Maybe he’ll carry the day and soften or lose and be chastened? Yeah right.


Grade F – should have taken the whole thing back.




Well, no matter how you slice this one, it’s safe to say that I nailed it.  Even with the EIA revising its production numbers up at the end of the year by about 500,000 barrels per day and some softness in prices, the relentless push for production continues unabated in the US. I predicted the US would add some 750,000 to 1 million barrels per day of production and with 20k a week being added on average, it’s fair to say it will be in that range. Bring it on I say! The sooner we get those barrels in the market the sooner they are gone from the market. Frac on! Production at Dec 31 2017 was 9.782, current production is 11.000, although after year end, production was adjusted up be some 270,000 barrels per day so the real starting number is somewhere above 10 million. With the current pipeline constraints in the Permian expect production growth to slow at least until all the Permian capital relocates to the less productive Eagle Ford and Power River Basin and other places for a little renewed hype and production party. Oh, and did we ever discuss how much growth is coming from the Gulf of Mexico? Didn’t think so. More than 250,000 bopd.


Grade – A+


In Canada, I predicted a more modest growth in production – probably in the order of 250,000 to 300,000 bpd of oil coming from both oilsands and the conventional/unconventional world. So far, so good.


OPEC production levels were forecast to be flat year over year unless the US started to get really out of control and so far, there is no reason to deviate from that prediction. Notwithstanding the new barrels coming online from Saudi Arabia, these are really just replacing lost Venezuelan barrels and the expected production loss from Iran sanctions. It will be worth monitoring how much more capacity OPEC is going to add. Discipline is still there and it appears that some in OPEC are not as fussed by global supply issues as some politicians facing rising gas prices and mid-term elections might be. That said, the writing is on the wall, the theoretical cap on production may remain in place with unplanned outages but the OPEC + needs to produce more and they will.


Price of oil


You know, it’s hard to be this smart. Had the oil price figured out right from the get go. Please send any congratulatory cards via email – out of respect for the environment. Sadly, I also had a Western Canada Select forecast. There are no words.


The call for this year was a year-end price of $72.34 and an average price for the year of $67.24. Actuals for are $73.25 as at September 28 and an average for the year of $66.78.


So we’ve over shot the spot price but the average is looking pretty good. I think prices come down to the end of the year – I can’t buy the whole $100 oil hype.


Grade – A-, I may have peaked too soon – hope the final exam isn’t too hard.


Price of Natural Gas


Ah natural gas, I can’t quit you! Natural gas has been disappointing me and pretty much all of Canada with lousy pricing for the last two years if not an entire decade. Super cold winter, massive snow falls, larger than normal withdrawals from storage, global warming, record power consumption, massive air conditioning use, LNG sucking up every spare molecule, nothing seems to be able to bring prices up. Why? Who knows. Certainly not me.


My year end price call for natural gas was $3.66 with an average price of $3.33. Actual September 28 price was $2.977 and the average was $2.847. If you are keeping track, the price and average have barely moved since June 30. So my only hope here is some massive break in gas prices heading into winter. I’m not very optimistic. That said, LNG!


Grade D – need to do a way better job on natural gas pricing.


Activity Levels


I predicted 2018 activity in Canada was going to be flat compared with 2017 and the first three quarters of the year certainly did nothing to dispel that impression. In actual fact we are quite a bit behind last year, which blows. Soft gas prices, no LNG, uncertainty in BC, pipeline and transportation BS and a complete lack of enthusiasm for Canada in the investment community have held back activity, in particular in BC where activity levels have been surprisingly weak.


As we move forward into what is traditionally a busier time of year, we have been subjected to the wettest September in memory, dragging on activity even further. I do hold out hope for strength toward the end of the year and am finely attuned to the first hint of an upward capex revision. Still too early to tell what is coming and who it will come from. Some oilsands and heavy oil projects are inching forward. Activity continues to be concentrated in the Montney/Duvernay and the Bakken and recent M&A point to a re-arranging of deck chairs. Service company M&A suggests a strategic positioning is happening and the negative sentiment is WAY overplayed, in particular as it regards heavy oil and the Canadian discount. I actually feel a Canadian breakout is coming – there, you heard it here first, load up on Canada or you’ll get left behind!.


Grade B – for being pessimistic, you get rewarded


US activity was expected to show quite robust growth and, well, Permania. Need I say more. In fact, I would say that I underestimated this drilling activity by probably 100 to 200 rigs. I did not predict the current plateau in rig count, but then my forecast didn’t appropriately account for the shipping issues being faced by Permian producers. Expect the rig count to expand to the end of the year based on the forward curve, but not as smartly as earlier in the year – labour and materials are tighter, costs are rising, and the brace of DUC’s needs to be culled. However, cash continues to flow in unabated from Wall Street, notwithstanding pronouncements about “capital discipline” and all that jazz.


Grade C – this call was way too easy


M&A Activity


2018 was predicted by yours truly to be a robust year for energy M&A across the board. While we have seen that in spades in the United States as the great Permian portfolio exchange continues, the bug seems to have missed Canada, at least so far.


The problem for Canada is that regulatory gridlock is used by buyers as an excuse to either avoid the sector altogether or put forward absurd or insulting valuations. As with activity levels, this feels both overplayed and self-inflicted. For example, if all Americans buyers and capital providers ever read about the Canadian energy sector is how impossible it is to get anything done, how dumb our federal and provincial leaders are, how the carbon tax is the end of the world do you really blame them for putting their shekels elsewhere?


That said, several notable deals on the service side by Mullen and CEDA among all others show that all hope is not lost. A positive LNG announcement will kickstart some activity on the infrastructure side. After all, who doesn’t want a piece of a $40 billion project that requires a $5 billion pipeline?


I also predicted was a US return to Canada at some point – I will stick to that, but it may not happen until December 31.


Grade – C, lots of room for improvement


Canadian Dollar


We predicted strength for the Canadian dollar with the commodity price, but that headwinds such as the pending demise of NAFTA, trade disputes and an overall lack of tax and other competitiveness with our noisy neighbour are killing our prospects. On the other hand, US exports are doing great on the exchange, until they get tariffed…. The Canadian dollar is a mess, trading in and around $0.77 and likely to show no signs of life until this NAFTA gong show is resolved. No grade here – incomplete.




OK, before I run screaming from the room. here was the forecast: Keystone XL and TransMountain will make significant progress and there will be a positive LNG surprise before the year is out.


I’m just going to let that sink in. Based on the facts on the ground, I actually did pretty well.


Sure TransMountain has stopped while the NEB goes back to look at the marine tanker traffic issue and an as yet unannounced process to complete proper consultation has to happen, the reality is that this project would be deader than a dead parrot if anyone other than the Federal Government owned it. Plus there was an actual shovel in actual ground. I know it’s easy to be skeptical. What isn’t easy is getting a pipeline built – the jury is out for me but I remain optimistic this thing is back on track by the Alberta provincial election in May.


Keystone XL was in a holding pattern at the beginning of the year but TransCanada just announced that construction would start in early 2019.Strangely the reaction was “meh”. People, wake up. This is a big deal. Bigger than TransMountain. Just saying.


Line 3 work is actually happening.


Finally, LNG Canada looks to be coming. Some people think the announcement will come next week now that the project has received some critical tariff exemptions for its steel requirements. This is the biggest deal.


Grade B+. It’s been good news, ex-TMX.


Stock Picks


OK, energy and energy related stocks have had a rough ride (at least my picks) up to the end of Q3, and if you’d followed my advice you’d be pretty hopping mad (please say you didn’t), but the exercize is it has to be energy and services – I wasn’t allowed to buy Apple!


Anywho, how’d we do?


Answer? Really bad.


Overall the portfolio is down 15.4% and is behind its benchmark, which is down only 2.2%. So massive underperformance – arg!!


I have no real explanation except that I went for a US small cap for fun and in the equal weighted portfolio that one name is killing me, Eco-Stim. Grr. Actually, who am I kidding, aside from Anadarko this portfolio is a bunch of dogs. Better luck next year… What? I get another quarter? OK, never mind, this is a portfolio of unfairly maligned, quality names just waiting to break out. Except Eco-stim, which is dead to me.

Grade D – underperformance with nowhere to go but up? Sigh.


Overall Grade? C, it’s all a work in progress.


Prices as at September 28, 2018 (Sept. 21, 2018)

  • The price of oil rose during the week on supply fears.
    • Storage posted an increase
    • Production was up
    • The rig count in the US was down marginally
  • After a smaller than expected injection, natural gas did nothing during the week…


  • WTI Crude: $73.25 ($70.71)
  • Nymex Gas: $2.977 ($2.981)
  • US/Canadian Dollar: $0.774 ($0.775)



  • As at September 21, 2018, US crude oil supplies were at 396.0 million barrels, an increase of 1.9 million barrels from the previous week and 75.0 million barrels below last year.
    • The number of days oil supply in storage is 22.8, below last year’s 31.5.
    • Production was up for the week at 11.100 million barrels per day. Production last year at the same time was 9.547 million barrels per day. The change in production this week came from increased production both in Alaska and in the Lower 48.
    • Imports fell from 8.024 million barrels to 7.802 million barrels per day compared to 7.427 million barrels per day last year.
    • Exports from the US rose to 2.640 million barrels per day up from 2.367 million barrels per day last week and 1.491 million barrels per day a year ago
    • Canadian exports to the US were 3.285 million barrels a day, down from 3.498
    • Refinery inputs were down during the during the week at 16.514 million barrels per day
  • As at September 26, 2018, US natural gas in storage was 2.768 billion cubic feet (Bcf), which is 18% lower than the 5-year average and about 20% less than last year’s level, following an implied net injection of 46 Bcf during the report week
    • Overall U.S. natural gas consumption fell 2% during the report week
    • Production for the week was grew 1%. Imports from Canada increased 2% from the week before. Exports to Mexico decreased 2%.
    • LNG exports totalled 18.4 Bcf.
  • As of September 24th, the Canadian rig count was 306 (AB – 217; BC – 24; SK – 60; MB – 5; Other – 0). Rig count for the same period last year was 358.
  • US Onshore Oil rig count at September 28, 2018 was at 863, down 3 from the week prior.
    • Peak rig count was October 10, 2014 at 1,609
  • Natural gas rigs drilling in the United States increased 3 to 189.
    • Peak rig count before the downturn was November 11, 2014 at 356 (note the actual peak gas rig count was 1,606 on August 29, 2008)
  • Offshore rig count was grew 2 to 20
    • Offshore rig count at January 1, 2015 was 55

US split of Oil vs Gas rigs is 80%/20%, in Canada the split is 68%/32%


  • Cenovus Energy Inc. signed three-year deals with major rail companies to transport approximately 100,000 barrels per day (bbls/d) of heavy crude oil from northern Alberta to various destinations on the U.S. Gulf Coast. Look for this to continue
  • Trump Watch: A busy week with the United Nations General Assembly, the Kavanaugh conformation hearing chaos and not firing Rod Rosenstein. Oh, and he really doesn’t like Trudeau anymore.
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