Crude Observations

Are you ready for some football?

That’s right, the NFL is back and for the next 5 months I get to stay up late and watch PVR’d football games while the rest of my family snores away, oblivious to my ridiculous addiction which is so bad that last year I watched a Cleveland game. Why am I bringing up football in an energy focused blog? Well first of all, because I’m super-excited for football, always have been and always will be. Secondly (and thematically) because like all true fans, I have been consuming a never ending barrage of top 10 lists on every aspect of the game, teams, positions and fantasy leagues.


In light of that, I have top 10’s and lists on my mind so I thought I would prepare my own list of things/items/stuff that energy people, like myself, are or should be thinking about over the next say, 5 or so months – say until the Super Bowl in February – that have the capacity to shape what is happening in our favourite industry.


I would also note, for posterity, that this is the blog that I wanted to lazily write last week before this whole TransMountain debacle effectively ruined my weekend.


So, here we go and in no particular order:


The Crude Observations Top 10 energy sector impacting things to pay attention to during the NFL season


1 – OPEC and the other non-OPEC guys


What, you were expecting something more subtle? As always, the oil world starts and stops with whatever OPEC decides to do and OPEC begins and ends with Saudi Arabia. The group has a meeting coming up in November (mid-season) at which it will review its current production strategy and then wait for Saudi Arabia to tell them what the decision is. All kidding aside, the key things to pay attention to with OPEC and the broader cooperation group are indications that the consensus is starting to fray, is there cheating going on, etc. With Russia and Saudi Arabia seemingly keeping their bromance going, key areas of concern are Libya (as always), emerging and ongoing issues in Nigeria and, of course, the unfolding disaster in Venezuela – which is a term I have used so often that I should probably copyright it. Market jitters about unpredictable production levels from those countries is contributing to higher oil prices. But maybe not as much as they should.


Another key OPEC storyline to follow is the effect of re-imposed US sanctions on Iran. The jury is out on how many barrels will come off the table for the global market, but current estimates are in the range of 1 to 2 million barrels per day, which is significant. In 2012 the Iranian barrels leaving the market added about $20 to the per barrel price – some of that is already priced in, how much is debatable. Will Saudi Arabia make up this difference? Can they keep it up over a medium to long term? And how brazenly will everyone outside of Europe cheat to get around the US sanctions regime. China clearly doesn’t care. Is it just a realignment of how the oil market works?


Last OPEC point – sure Iraq looks like it can pick up some slack, but did you see the chaos in Basra yesterday? Everything was on fire! Political unrest in OPEC countries is never a thing until it’s a thing, but that thing can happen quick.


2 – Emerging Markets


Just last week I was telling someone that what is happening in emerging markets is an issue that is not getting the attention it deserves. And the just this week, emerging markets started to get a lot of attention. So what’s the deal with emerging markets? Wasn’t the world a happy-go-lucky combobulation of countries big and small all experiencing concurrent positive economic growth for the first time in a generation? Yes, it was. Then Donald Trump decided to screw it all up. Seriously. By starting trade wars and introducing tariffs here there and everywhere, the United States has upended the risk profile around the world and introduced fear and uncertainty into what was previously a fairly benign global picture. And when fear rises, capital de-risks and that de-risking usually takes the form of a flight to US dollars.


So, if you are a generic emerging market country, all of a sudden you are seeing a fairly rapid devaluation in your currency and, if you happen to have US dollar denominated debt (like most do) the effect is to double down on your problems. Plus, US interest rates are on the rise as the economy grows and stimulative tax cuts and spending fuel inflation there, which makes lower risk US dollar debt very attractive. Throw in a bunch of tariffs and, well you get the picture. No? Not all the way there yet? OK, try this – currency devaluation and tariffs lead to increased costs accelerating inflation, plus capital fleeing for the safe haven US.


Finally, if you are an energy importing country, those imports are priced in US dollars, so energy prices go up as well. And when energy prices go up, demand goes down. So, the emerging markets currency issue should be a major concern for the energy sector insomuch as it creates more economic instability but, more importantly, in how much, if at all, it cause s demand destruction in global crude markets.


Who to watch? Indonesia. Argentina. Turkey. South Africa. Brazil. Pretty much everybody.


3 – US Mid-term elections


These could go either way and are pretty important. Although it seems like the voting is happening right now with all the chaos emanating from the White House and the theatre of the Kavanaugh Supreme Court Hearings, the actual mid-term vote is in November. Up for grabs is nothing less than control of the Legislative branch. Polling data shows a blue (democrat) wave set to sweep Congress while districting data and what seats are actually up for grabs lead many to believe in a red triumph. The reality is likely some form of purple people eater – with gains and losses on either side and maybe a shift in the balance of power to a more gridlocked state.


So what happens if the Democrats get a majority? You will likely see a much heavier hand when it comes to Donald Trump, investigations, perhaps impeachment proceedings if it tips enough. For sure his agenda gest stalled in its tracks which will lead to more clashes with the executive. This has positives and negatives, but for the energy sector, it’s probably a net negative if they stymie or roll back energy related initiatives.


Republicans keeping control of the House and Senate or even improving on their majorities undoubtedly gives Trump a stronger hand and reinforces his belief in himself even if the vote totals don’t reflect. For sure this is a net positive for the energy sector, but for the rest of the world? Maybe the equivalent of going to bed with a live hand grenade in your hand. Better hope for purple. In an environment like this sometimes a traffic jam is what is needed to slow things down.




While this may already be solved and we just aren’t hearing about it, I suspect that finalizing something is going to take a while. Pardon the pun, but the Mexican standoff between the Canadian negotiators, the US negotiators and Donald Trump’s thumb is truly epic and nothing short of entertainment at its finest – for trade nerds. Who would have thought that so much fun could be had talking about “dispute resolution”, “milk quotas” and “Canadian culture”.


I am not sure why the protection of Canadian culture is suddenly a hot button issue for Justin Trudeau, but allow me to assure him that there is absolutely no way any American broadcaster is even remotely interested in buying into Canada. Our culture, such as it is, is safe. If there is anything we have learned through these completely unnecessary renegotiations, it’s how little Americans know or care about Canada – especially the culture, just not of the dairy variety. So why does NAFTA matter for the energy sector? Costs and certainty. Perhaps with NAFTA settled we can lose those steel and aluminum tariffs and see some prices come down for what represents about 10% of the cost of drilling a well. Plus the whole “avoiding imminent recession” part is a positive. Without settling NAFTA?  Probably not looking so good for Canada as I would imagine Trump would be mad. But guess what? They need us in the deal, so… I guess culture is the right card to play?


5 – Permian Completions (Duck!)


We haven’t talked about this for a while, but apparently there are a lot of ducks in the Permian. In fact, there are so many that it leads me to think that maybe they need a quota system, kind of like our beloved Canadian dairy system. Why are there so many DUCs (to use the correct term)? Well mainly it is because it is taking longer and costing more to complete wells or producers are simply not completing them because once complete there is nowhere to send the product because of pipeline constraints that won’t be solved for a couple of years. So while companies are still making swiss cheese (there’s that dairy reference again) out of Texas, they just aren’t finishing the job. Which of course makes their cash flow look better, allowing them to raise more money. Hmm…


In an interesting side note about the Permian, did anyone read what the CEO of Schlumberger told an investment conference? There was a lot there, but let’s start with a quote then I will summarize the rest:


“However, the main challenge in the Permian going forward is more likely to be reservoir and well-performance, as the rate of infill drilling continues to accelerate.”


Hmm, what does that mean? He explained it after but it was long, so I will shortcut it for you. What he was basically saying is that they have observed in the Eagle Ford a trend which they expect will occur in the Permian as well that when the number of child wells (we call them infills) rises past a certain percent of wells drilled, well performance decreases after adjusting for lateral length and proppant use. So while there appears to be great strides in productivity, not all wells are the same. Normalize them and performance is actually lower. Gist of it – based on these productivity declines, Permian growth may be aggressive or overstated – don’t put all your eggs in one panhandle or something like that.


Good for Canada right? At some point – maybe soon.


6 – Stupid TransMountain


Whatever is going to happen on this file is without a doubt critical to Canada both economically and psychologically to show the world we can actually get things done within the rule of law. A lot of ink and electrons have been expended over the past week as everyone and their crazy uncle has stepped out with their own opinions about what should happen, what went wrong, why judges suck, why renewable energy would solve this, why we need refining, why we don’t, blaming the Conservatives, blaming the Liberals, blaming “eco-terrorists” and “foreign money”. The usual stuff.


Who we haven’t heard from yet is the Federal government and what their solution or next step is. They need to get on it. This is an existential crisis and needs action to be taken, quickly. Without swift and decisive action, the money that was planning to come to Canada is going to hesitate, and that’s a hesitation we can’t afford. Not with everything else going on and the NAFTA, tariff and emerging markets headwinds we are all dealing with.


I tried to take the pragmatic view last week and offered my two cents, so herewith my advice to Justin – the ruling told you what to do, just do it. Believe in something, even if it means sacrificing everything. Just do it.


7 – Capex


I think it is going to be really critical to observe what is going to happen with 2019 spending plans for the Canadian oilpatch. While the oilsands side deals with pipeline headaches, there are a host of companies operating in high growth, exciting unconventional basins across Western Canada. These companies are expected to offer up some growth into 2019 after 2018 disappointed many. Don’t get me wrong, people are busy, in specific locations, but they could be much busier. I suspect they will but at this stage we don’t have that picture. Basing this off nothing but gut instinct, I rather suspect that 2019 will be the year that Canadian capex growth on a year over year percentage basis could exceed that south of the border. But of course it all remains to be seen. Pipeline uncertainty (even if they aren’t going to carry condensate) and Suncor talking down its growth plans didn’t make anyone happy, but there is more to the oilpatch than oilsands.


8 – M&A


As prices hopefully hold steady and activity and spending plans pick up, it is time for M&A activity to pick up as well. We have already seen plenty of deals happening in the US, where acreages trade hands regularly as producers consolidate and of particular note, the midstream space seems to announce a deal a day. On the US service side, deal activity is picking up as well. Here in Canada, we need a little bit of that love. It has been “sporadic” to be generous, but the gears are turning. One of the advantages we have in Canada is that multiples are generally lower than our flashy southern counterpart and once the long tail of the recovery starts up that growth curve, many players priced out of the US market turn their attention back to us. Judging solely by the number of email and phone queries we are receiving from US based private equity, family office, strategic and other types of buyer, the anecdotal evidence shows that people are looking our way again. Finally.


9 – LNG for the win


So. If I’m the CEO of, say, Shell. And I have this fancy pants LNG project I have been contemplating for, what, five to ten years. And it’s in British Columbia. And it has First Nations support. And it has been approved by all layers of government. And I have a limitless supply of cheap gas and a pipeline company that is ready to build an (approved) line to my port. And I have partners who want gas. And China is threatening US LNG with tariffs.




I haven’t made a Final Investment Decision yet even though I’ve teased about it for close to a year.


So I’m that CEO. What should I do?


Oh, and don’t forget that we have a federal and provincial government desperate for a win on any energy-related infrastructure project they can get their hands on. What should I do? I know what I would do. I would call up my pals Trudeau and Horgan. I would tell them my last two or three out there but not so unreasonable demands – most likely accelerated capital cost allowance or some other bundle of tax concessions. And I would get them. And then I would issue my FID and let the politicians take the credit. Then I would build an LNG plant and be treated like a saviour in the Canadian energy sector.


That’s what I would do. LNG for the win.


10 – Energy East Restart


No. I’m kidding on this one. Not happening. Sorry to tease you. My list of 10 was really a list of 9.


Happy weekend. Go Cards.



Prices as at September 7th, 2018 (Aug 31, 2018)

  • The price of oil fell during the week as tariff war concerns trumped supply issues
    • Storage posted a decrease
    • Production was flat
    • The rig count in the US was up marginally
  • After a smaller than expected injection, natural gas did nothing during the week…


  • WTI Crude: $67.77 ($69.80)
  • Nymex Gas: $2.772 ($2.916)
  • US/Canadian Dollar: $0.7615 ($ 0.7665)



  • As at Aug 31, 2018, US crude oil supplies were at 401.5 million barrels, a decrease of 4.3 million barrels from the previous week and 60.9 million barrels below last year.
    • The number of days oil supply in storage was 22.6 behind last year’s 27.2.
    • Production was up for the week at 11.046 million barrels per day. Production last year at the same time was 8.791 million barrels per day. The change in production this week came from decreased production in Alaska and increased production in the Lower 48. Last year’s production included hurricane-related shut-ins
    • Imports rose from 7.485 million barrels a day to 7.714 compared to 7.083 million barrels per day last year.
    • Exports from the US fell to 1.556 million barrels a day from 1.779 last week and 0.153 a year ago
    • Canadian exports to the US were 3.507 million barrels a day, down from 3.532.
    • Refinery inputs were down marginally during the week at 17.647 million barrels a day
  • As at August 31, 2018, US natural gas in storage was 2.568 billion cubic feet (Bcf), which is 19% lower than the 5-year average and about 20% less than last year’s level, following an implied net injection of 63 Bcf during the report week
    • Overall U.S. natural gas consumption was down 2% during the report week
    • Production for the week was flat. Imports from Canada were down 7% from the week before. Exports to Mexico were up 2% from the week before.
    • LNG exports totalled 17.7 Bcf.
  • As of September 3 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 7, 2018 was at 860, down 2 from the week prior.
    • Peak rig count was October 10, 2014 at 1,609
  • Natural gas rigs drilling in the United States was up 2 at 186.
    • 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 up 1 at 17.
    • Offshore rig count at January 1, 2015 was 55

US split of Oil vs Gas rigs is 80%/20%, in Canada the split is 62%/38%


  • All that stuff above
  • NAFTA!
  • Football!
  • Trump Watch: I don’t have any idea where to start.
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