Crude Observations

Back to Work… And Not a Moment Too Soon

So there you have it. Summer as we know it is over. I suppose it’s time for all of us lazy bones to get back to work and do something productive. I mean aside from the super important blog writing.


So here we sit on the eve of the Labour Day Weekend, or as we call it in Canada – Future Bill Morneau Tax Freedom Day – contemplating what the next few months are going to bring us in the energy sector as we deal with confluences of events both within and beyond our control. First and foremost, apologies for the tardiness of this post – I have been trying to squeeze in the alst few days off before the kids mercifully go back to school so have been a bit lax in my typically regimented timing.


Typically, the period from Labour Day through year end is the second busiest part of the year in the energy sector in Canada as budgets for the new year get set by most producers triggering either celebration or terror in the service sector and much “I’m so smart and this is how the world will unfold” commentary in the business press. It is also a time where the M&A world heats up and people in our line of business get seriously back to work as companies adapt their strategies and position themselves to take advantage of the cyclical opportunities that are arising.


Against this are the usual headwinds and tailwinds of the energy market, all magnified by the current sense of urgency imparted by stubbornly low commodity prices. Against this backdrop are the one-off events that move markets such as we have seen in the past week… with the release of the new Taylor Swift song and video. I am told those are real diamonds.


Without further elaboration and in no particular order of importance, the following are some of the key influencers we should keep our minds on over the next few months and, where appropriate, some thoughts on where they are going and how they might influence the market.


Fallout from Hurricane Harvey


Without a doubt, this is, at the moment, the most influential event affecting the North American energy market.


But before I make any comment, a special note to all of my Houston, Texas and U.S. based readers as well as any all business colleagues and acquaintances who have operations in the Southern US and have been impacted by this storm and its aftermath. It is impossible to see all the flood damage, devastation and loss of life and not be heart-broken. Natural disasters around the world all come with human tragedy but they really get brought home when they are personalized. And anyone working in the oil patch can’t help but be impacted given how connected the industry is. On the other hand, the stories of resilience and human spirit are inspiring and give me confidence that the area will be rebuilt and back up and running sooner that anyone thinks. People in Texas and in the oil patch are typically “can-do” by nature and, much like Calgary after our 2013 flood, this attitude will take over. Our thoughts are with all of you as you begin this long and painful journey.


As it regards the fallout from Harvey and how it will affect the energy industry, this is typically hard to predict but there are a few areas that I think should be watched and I am interested in:


  • With around 20% of refining capacity off-line, clearly there will be an immediate impact on gas prices and a likely short term spike in inventory levels as existing production starts to pile up in storage facilities around the country. That said (and less talked about) a significant amount of off-shore production was shut in and major producing land-based areas like the Eagleford have been directly impacted, with some estimates as high as 500k barrels a day of production off-line. It is impossible right now to gauge when that production will be restored and whether it can or will recover to prior levels or even what impact extensive flooding may have had on legacy production, never mind roads, drilling and completion equipment. The jury is out on this and I don’t believe it is being adequately covered by the press when the refining story is just too exciting. Flooding in the field is likely to have way more impact in the long term than precautionary shut-downs of plants built with proper drainage and disaster safeguards. For this reason I think the sell-off of WTI is possibly overdone and there may be a production impact longer term.
  • The recovery efforts in what is currently estimated at a $160 billion price tag are going to be massive and will require labour, material, equipment, labour and more labour. This cannot have anything but an inflationary effect across the state and region as people flock to Houston and area to participate and assist in the effort. This inflationary effect will be felt in labour costs across the energy sector as critical resources will most assuredly leave oilfield jobs for the rebuild effort, especially if it involves family. This is most assuredly going to result in increased costs and higher break-evens for marginal Permian and other tight oil producers, putting further downward pressure on production, absent any significant price rally.
  • Doing business in the oilpatch is likely going to be more difficult in the short term as companies will inevitably be inwardly focused on business recovery, ensuring their staffs are adequately taken care of if they have been displaced and generally paying more attention to what is happening at home. I suspect this will lead to a pretty marked slowdown in cross-border work, deal execution and inbound and outbound M&A. It’s hard enough to get Houston to pay attention to Canada at the nest of times, it’s going to be near impossible when there is so much happening at home. Look for opportunistic Canadian firms to fill the gap.




What more can be said about Venezuela. It’s a hot mess. Production is cratering, there are billions of dollars in debt coming due in the next three months, the US has imposed economic sanctions, the populace is starving and the spectre of anarchy and sovereign default is evident. At the same time, the PDVSA owned Citgo refinery in the United States has been pledged as security to Rosneft and the US is acting to secure it’s national security interest in this asset before it gets taken over by a Russian company, no doubt controlled by Vladimir Trump, I mean Putin. A geopolitical disaster that I believe the market is mostly ignoring.




Tax cuts in the US? The deuce you say. It’ll be interesting to watch as the United States sets about lowering taxes on businesses and individuals at exactly the same time our fearless boffins in Ottawa are jacking them up to pay for their massive deficits. How many smaller Canadian firms, such as highly portable M&A boutiques are going to seriously consider packing up and moving. There are dozens of companies in Canada getting toeholds in the very robust US market. Expect this number to scale by a factor of ten if these ill-advised tax changes make it through.


Trans Mountain 


I expect construction to start soon. I am not sure why so many people believe otherwise. I am also not sure why I believe what I do. Maybe I’m just an optimist. The company has played by the rules, answered every challenge, raised its funds and is shovel ready. Yes the government in BC has joined one of the suits against the pipeline, but that is the weakest hand they had to play. It feels like posturing. And I know there were a bunch of hipsters in the Puget Sound practicing their protesting skills and tactics, but clearly they won’t be coming into Canada anytime soon since the only way here is by fossil fuel powered vehicle. Let’s get digging.


Whither Gas?


No, not gas for vehicles, natural gas. The oft-overlooked commodity is exiting one of the weaker injection seasons in recent memory and is getting no love at all from the investment community. While I realize that the Marcellus is the exciting marginal cubic foot of gas, might I remind everyone that Texas is a massive producer of natural gas and that when any tight oil is shut-in, so is the associated gas it was producing. More on this in September, but the gas play has horns not claws. 5% of US production is currently off-line because of Harvey. That’s a lot.




Before Harvey, my expectation was that capex could easily see a 10% pull-back in both Canada and the United States given commodity prices. Now I am not so sure – much will depend on what damage if any happened in the Eagleford. That said, prices lingering below $50 have put the brakes on a lot of investment and service bottlenecks are preventing companies from spending the money they actually want to, thus many companies have announced plans to cut spending both this year and into the next. Throw in the inflationary effects of the Harvey rebuild as discussed above and, certainly in Texas, a pull-back in capex higher than that 10% doesn’t seem unreasonable. A beneficiary of that pullback may, in a perfect world, be Canada. The other side of that of course will be the tendency towards investing at home as part of the rebuilding process. Flip a coin, I guess.




Already the musing is out there that the production cuts may be extended even further, which isn’t a bad thing. With Libya almost maxed out and tenuous as a producer and Nigeria it’s typical self, the thinking inside of OPEC/NOPEC must be that all the wildcards for increases in production are now baked into the numbers and their reduced production and smoking hot demand growth are finally going to start grabbing gears but that abandoning the cuts too early could derail the whole thing. Mix in Harvey, crazy North Korea missile launches, Iran/US tension and an IPO that needs to achieve a value target and the writing is on the wall – production stays managed through at least June if not longer and prices are setting up for a rally through 2018.


So, there you have it, a boiling cauldron of all sorts of fun and nasty stuff going on all at once. All concurrently tugging the energy sector in different directions – I feel like the next four months is going to be a pretty wild ride.


Time to get back to work.


Prices as at September 1, 2017 (August 25, 2017)

  • The price of oil fell during the week despite solid US inventory draws but rallied on Friday as Harvey had his way with the Gulf Coast refining complex
    • Storage posted a large decrease
    • Production was flat
    • The rig count in the US appears to have plateaued
  • Natural gas rose during the week on high demand and Harvey related supply interruptions. Injections continue to feel small this year, especially with the incremental rig count


  • WTI Crude: $47.35 ($47.80)
  • Nymex Gas: $3.065 ($2.899)
  • US/Canadian Dollar: $0.8069 ($ 0.8016)


  • As at August  25, 2017, US crude oil supplies were at 457.8 million barrels, a decrease of 5.4 million barrels from the previous week and 37.4 million barrels below last year.
    • The number of days oil supply in storage was 26.0 behind last year’s 31.5.
    • Production was up for the week by 2,000 barrels a day at 9.530 million barrels per day. Production last year at the same time was 8.488 million barrels per day. The change in production this week came from an increase in Alaska deliveries and lower Lower 48 production.
    • Imports fell from 8.790 million barrels a day to 7.905 compared to 8.917 million barrels per day last year.
    • Refinery inputs were up during the week but still strong at 17.725 million barrels a day
    • Next week’s data is going to be quite an interesting contrast
  • As at August 25, 2017, US natural gas in storage was 3.155 billion cubic feet (Bcf), which is marginally above the 5-year average and about 7% less than last year’s level, following an implied net injection of 30 Bcf during the report week.
    • Overall U.S. natural gas consumption was down by 10% during the week – led by power and industrial demand
    • Production for the week was down 3.6 Bcf/day as a result of Harvey shut-ins. Imports from Canada were down 2% compared to the week before. Exports to Mexico were down 11% due to Texas based pipeline issues.
    • LNG exports totalled 3.6 Bcf.
  • As of August 28 the Canadian rig count was 186 (29% utilization), 119 Alberta (28%), 25 BC (35%), 37 Saskatchewan (32%), 5 Manitoba (33%)). Utilization for the same period last year was just above 15%.
  • US Onshore Oil rig count at September 1 was at 759, the same as the week prior.
    • Peak rig count was October 10, 2014 at 1,609
  • Natural gas rigs drilling in the United States was up 3 at 183.
    • 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 down 1 at 16
    • Offshore rig count at January 1, 2015 was 55
  • US split of Oil vs Gas rigs is 80%/20%, in Canada the split is 56%/44%


  • Wildfires continue to rage in British Columbia. Please consider a Red Cross donation if you can. It’s simple, easy and it helps
  • Hurricane Harvey dropped more than 4 feet of rain across Southern Texas. Please consider a donation in support of rebuilding efforts. Not sure which organization is best, but the JJ Watt story is kind of cool. What is it now, $15 million and counting?
  • Trump Watch: OK, so it was Harvey week in Trumpland and, aside from the media carping about his comment on crowd size, Melania’s shoes and him not actually going directly into Houston (come on, seriously he was expected to do that?), the Donald actually has conducted himself credibly. I’m no super-fan and the bar was low, but he’s doing what he’s supposed to do, albeit in his own unique way. I give him a B+ so far.
Crude Observations
Sign up for the Stormont take on the latest industry news »

Recent Posts