Crude Observations

Enough with these Canada problems

It’s been a big week in the energy sector, hasn’t it? What with Donald Trump bailing out of the UN/Iran nuclear agreement, supply squeezes and other volatility, it would appear that my tongue-in-cheek forecast of $300 oil is well on its way, right? And, with all the exciting developments on the Canadian pipeline front this past week, well it seems like…. Oh wait, there were no developments on the Canadian pipeline front. Sorry. And $300 oil? Not a real thing. But, hey, it’s important to make it all about us, right?


Most of the time yes. And I do have an exceptionally Canadian bias in my comments because, let’s face it, I’m Canadian, my firm is Canadian and the Canadian energy sector in many wqays resembles a full on dumpster fire.


But, in our haste to self-immolate over the state of the energy industry in Canada we tend to forget that there is a bigger world out there and that not everyone is basking in Permania, has “Canada” problems or is swimming in general Saudi wealth..


As a all-around advocate for maximizing the amount of heavy oil we are able to ship to the thirsty refineries in the United States, I am more than happy to celebrate the rising demand and market share our heavy oil is receiving. That said, it is worth taking a look past the end of our noses at who we are gaining market share from.


I am referring specifically to Venezuela, which, outside of the much more top of mind Syrian debacle, continues to be the most underreported, tragic, and completely unnecessary societal collapse we may ever witness.  At least from where I sit.


An apt question at this point is “why”? Anytime you turn on the news it’s mostly about the collapse in Syria and the refugee streams to Europe and other parts of the Middle East and the great power struggle that is happening between the United States, Russia, Iran and Saudi Arabia. It’s fascinating and easily accessible because the Middle East has been the story for pretty much my entire life.


And I guess because the Middle East has always been a flashpoint and holds so much cultural, religious and historical significance for so many, we can be forgiven for being a bit obsessed. Besides, when people think about South America they think about soccer, coffee, Colombia, Miss Universe Pageant winners, not failed Petro states.


But Venezuela is coming apart at the seams and when it is over, the repercussions for the global economy will make what happened in Syria seem like an afterthought.


It is unforgivable to watch what is happening to a once great country and the holder of arguably the largest oil reserves in the world. A country of great wealth squandered on the ebb tide of failed nationalization, political pandering, greed, hunger for power and disdain for the people which is every bit as insidious and evil as Assad bombing his own people. It may not move as fast or gather as many clicks but it’s every bit as deadly.


Last week I joked that China had purchased Venezuela, which of course was tongue in cheek – mostly. The reality is that that may in fact be a favourable outcome in the face of the various alternatives.


Venezuela update.


Blessed (and cursed) with the largest reserves of oil in the world, Venezuela, which was once the wealthiest country in South America, is pretty much a failed state.


Don’t believe me? Consider the following.


Depending on whose stats you use, GDP shank by about 10% in 2015, 20% in 2016 and a further 14% in 2017.


Inflation in 2016 was 800% and some estimates suggest it will run at a staggering 8000% in 2017 and 13,000% in 2018 – the currency is for all intents and purposes worthless. The country can no longer  import the goods it needs. The government attempted to establish a form of cryptocurrency based on the value of oil, but the market saw right through it.


Foreign reserves are estimated to be about $10 billion


Foreign debt is estimated to be about $140 billion including debt issued by PDVSA, the National Oil Company.


Oil production accounts for 90% of exports but, starved of capital investment because of government incompetence, production has declined to just less than 1.5 million barrels per day from its pre-Chavez peak of 3.5 million.  This is a 30-year low and the prospects are that it will fall further. As bad as the notional barrels that any re-applied US sanctions on Iran will remove from the market, Venezuela is twice as bad. Put another way, if OPEC had not implemented any cuts at all, the collapse in Venezuelan output would likely have rebalanced the markets anyway, maybe taking 6 months to a year longer.


As the only source of foreign exchange to pay off the crushing debt, the NOC is really the only thing standing between marginal solvency and complete collapse and anarchy. It is, as I read somewhere, an oil company with a country attached. Except not so much anymore. In just the last week, Conoco has seized assets owned by PDVSA in the Carribean for non payment of debt, a move that could set off a cascade of similar actions as creditors race to secure themselves.


Once self-sufficient and a major exporter of food, Venezuela now imports more than 90% of its food requirements largely because government imposed price controls and subsidies (that it can no longer afford with the fall in oil prices) and nationalization of private business has discouraged production, not to mention rampant corruption and an official exchange rate disconnected from reality. Food shortages are everywhere and food rationing by government is being used as a way to control the population.


Record rainfall during the rainy season around Caracas has filled all the reservoirs, yet the city can’t consistently get running water because maintenance on the water system has ground to a halt. There are more than 5 million people in Caracas.


The same situation exists in the health care sector, where government cannot afford to provide even the most basic medical supplies.


The individual and collective tales of human suffering are heart-breaking. Infant and maternal mortality were up a staggering 30% and 65% in the last year. Chronic malnourishment has led to the average citizen losing about 20 lbs in the last year and is expected to have knock-on effects on health of the general population for generations to come. If you have the stomach for it, I recommend you follow the Caracas Chronicles for the view from the inside. 13,000 doctors have left the country in the last four years and the government refuses to accept massive donations of medicine from neighbouring countries.


The country’s main electricity provider can only supply power sporadically due to chronic mismanagement and a persistent drought.


The country is among the most violent in the world and the capital, Caracas, is the murder capital of the planet with a murder rate of 130 per 100,000.


Government support is below 20% yet the ruling party of Nicholas Maduro is widely expected to win an election set for May 20, further consolidating power through his cronies and some (not all) of the military.


And the government blames an international plot and the Americans for its problems.


And it is all so unnecessary and, sadly, might have been avoidable.


It is beyond me how the current government continues to cling to power while organizations such as the United Nations, the IMF, and others sit idly by. Only the OAS (Organization of American States) has put any pressure on the Maduro regime, mainly because they are direct neighbours. Meanwhile, Russia and China and Cuba provide tacit or momentary support to further their own self-interests.


Where are the Americans and what is their strategy to deal with this unfolding collapse of civil society, rule of law and, in theory, liberal democracy in their own backyard?  Sanctions here and there? A few “attaboys” for taking on a theoretical socialist, Bolivarian menace in South America? If the United States thought it had a problem with immigration from other Latin American countries, wait until the flood from Venezuela starts.


It is often said that if Syria had substantial reserves of oil and gas that the world, led by the United States, would have intervened against Assad much sooner and prevented that crisis from escalating. Well, Venezuela has those reserves and the time for the international community step up is almost gone. What’s the plan guys?

Sorry to be so depressing, but it’s depressing. To me, Venezuela puts a lot of things in perspective. It puts TransMoutain in perspective. It puts Kenney/Notley/Trudeau/Horgan/Ford/Wynne/Weaver/Scheer in perspective. It puts Trump in perspective. It puts the Permian in perspective. We live in one of the richest and most resource endowed countries in the world and our own self-indulgent hubris demands that we squander it under a tidal wave of bad policy, NIMBYism and environmental pandering.


Look, I’m not saying we’re Venezuela, far from it. But … if you want an object example of how misguided policy and populist pandering unfolds, well a mere 6,000 kilometres away, there is a country with the equivalent energy potential to Canada whose hair is on fire. And it appears they are on their own.


Which I guess is kind of where we’re at with all of our stuff. We are indeed on our own, no one is going to solve our, by comparison, petty problems for us. It’s time to grow up, end the endless debates, park the stupid and get on with it.


Prices as at May 11, 2018 (May 4, 2018)

  • The price of oil held rose during the week after President Trump exited the Iran nuclear agreement
    • Storage posted a decrease
    • Production was up marginally
    • The rig count in the US was mixed
  • After a larger than expected injection, natural gas gave up some ground…


  • WTI Crude: $69.72 ($69.72)
  • Nymex Gas: $2.711 ($2.711)
  • US/Canadian Dollar: $0.7780 ($ 0.7780)


  • As at May 4, 2018, US crude oil supplies were at 438.8 million barrels, a decrease of 2.2 million barrels from the previous week and 88.8 million barrels below last year.
    • The number of days oil supply in storage was 26.0 behind last year’s 30.7.
    • Production was up for the week by 84,000 barrels a day at 10.703 million barrels per day. Production last year at the same time was 9.314 million barrels per day. The change in production this week came from a decrease in Alaska deliveries and a increase in Lower 48 production.
    • Imports fell from 8.539 million barrels a day to 7.323 compared to 7.620 million barrels per day last year.
    • Exports from the US fell to 1.877 million barrels a day from 2.148 last week and 0.693 a year ago
    • Canadian exports to the US were 3.650 million barrels a day, down from 3.725
    • Refinery inputs were down during the week at 16.486 million barrels a day
  • As at May 4, 2018, US natural gas in storage was 1.432 billion cubic feet (Bcf), which is 27% lower than the 5-year average and about 38% less than last year’s level, following an implied net injection of 89 Bcf during the report week
    • Overall U.S. natural gas consumption was down 4% during the report week
    • Production for the week was flat. Imports from Canada were up 2% compared to the week before. Exports to Mexico were flat.
    • LNG exports totalled 21 Bcf.
  • Can you say “Break-up”? As of April 30 the Canadian rig count was 74 – 71 Alberta, 2 BC, 1 Saskatchewan, 0 Manitoba and 0 elsewhere. Rig count for the same period last year was actually higher.
  • US Onshore Oil rig count at May 11, 2018 was at 844, up 9 from 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 199.
    • 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 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 70%/30%



  • The average spot price for deliveries at Western Canada’s AECO C price point declined to US -$0.01 per million British thermal unit (MMBtu) on Friday, May 4. This is the first time the average has registered a negative price. The negative price was a result of high storage, seasonal declines in demand and pipeline maintenance.
  • Enbridge sold some renewable power assets and a natural gas gathering system to continue to pay down debt
  • Shell sold the shares in CNRL it had received as part of the consideration for the oilsands assets it sold to CNRL last year. While the $4.3 billion sale pushed the price of CNRL stock down on the day of the announcement, the price rallied smartly later in the week.
  • Trump Watch: It was a mixed week for Donald. He brought home some hostages from North Korea which was widely viewed as positive, however ditching the Iran Nuclear agreement received mixed views. Bibi was happy.
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