Crude Observations

Fearless Forecast!

Are you ready for it? Because it is that time of year again where I lay myself bare to all of your collective scorn and ridicule and put out the one and only Fearless Forecast that you absolutely must read, Right Now!!!!! In all seriousness, this could very well be the most important thing you read today. Before you put another dime to work in the energy sector.


For years now, savvy investors have been hanging off my every word, waiting with breathless anticipation with their brokers on hold pending the release of the veritable pearls, nay gems of wisdom that come to me in random flashes like visions came to Moses…


What was that? Was I asleep at my desk again? Sheesh, this sleep deprivation is really getting to me, I sure hope I didn’t say anything dumb.


Back to the task at hand. Each year I do this Forecast, not because I’m particularly good at it, but because I find it an interesting way to organize my thoughts about what may happen as the year progresses and to get a few interesting tidbits out to those of you who pay attention to such things, if only to start a dialogue on some of these ideas.


Not to mention that it is the greatest forecast ever assembled! Way better than the ones all those “other guys” put together. Goldman Sachs? What do they know! ARC Financial? Ain’t gonna hold a candle to this stuff…


Ugh, sorry, dozed off again. Maybe I should just get on with it. Bam! Awesome!


OK, so, the way I like to do this is to look at a few themes then drill down to some specifics, then pick the wrong team to win the Super Bowl.


Broad Themes


One of the bigger themes I am thinking about this year relates to a general level of civil unrest and the fear premium now priced into the market that shows no signs of going away. The Middle East is a highly volatile region and all the elements are in place for things to come precipitously off the rails as Saudi Arabia and Iran jockey for the hearts, minds and control of the countries around them, embassies in Israel get moved around, Syria comes further unglued, Iranian proxies Hezbollah and Hamas keep messing around and the Saudis continue their pointless war in Yemen. Go figure, in all of this, Iraq is a beacon of stability!


Domestic issues and protests are sure to continue to plague Iran and Saudi Arabia where each has large blocs of underemployed millennials looking to lose the shackles of repressive and out of touch regimes.


Further to that, much of this general level of unrest stems from the fact that a lot of these countries are demographically very young but the levers of power are concentrated in mostly dictatorial governments dominated by hard-liners who are often separated from the population not just economically but also by one, two and even three generations. They have very little in common with their general population and it is showing up as protest. This bifurcation is creating tremendous stresses on societies and is particularly the case in the Middle East as noted above, as well as Africa and the Indian subcontinent where birth rates have been very high for many years.


Unrest will also be significant in Venezuela, which continues its tragic spiral into chaos and global irrelevance. It has been forecast that oil production in Venezuela will decline in 2018 from current levels around 1.8 million barrels per day to as low as 1 million barrels per day. This in a country that (maybe) boasts the largest reserves in the world, is a founding member of OPEC and once had production of more than 3.5 million barrels per day before Hugo Chavez systematically dismantled the industry and destroyed the country. The loss of this supply is bewing severely discounted by the market.


Technology. Not the fake field service technology of shoving ever-increasing amounts of water and sand into a longer horizontal well. That’s brute force disguised as something new. I’m referring more to technology like “Blockchain“. There, I said it. What forecast would be complete without evoking Blockchain.


Blockchain will be big in the energy industry in 2018. How? I don’t know. I’m not sure I actually understand what blockchain is, but I’ve read a lot of really interesting articles by some very smart people that say it’s coming. And it is. If only I knew what it was.


OK, I’m not that dumb – I get what it is and in an industry as complex as the oil and gas industry, anything that creates a new way to optimize supply chain management and peer to peer transaction processing is a good thing right? And after three years of cost-cutting and a new found demand from investors to generate margins, profits and returns, a transformational, disruptive and cost-saving technology can’t help but be adopted. In an ironic twist, it’ll likely be led by the biggest and baddest companies in the industry that take the big leap because they are the most massively complex.


On the energy front, while the Permian and US tight oil is always going to be front and centre, the reality is that it is a small portion of the global mix. While all the noise is going to be around shale, the real theme in the energy industry this year is going to be the period of reckoning from a lack of investment in oil outside of North America and core OPEC. With major finds at decade lows and investment off across the board, the spectre of a supply crunch emerging after so much time and attention being paid to an oversupply is real and coming.


I’m much more sanguine about Donald Trump and think his influence on world events will wane as the year progresses, mid-term elections approach and the legislative branch starts to take back some power. For sure he can still do some damage and enact chaos by executive order or kill NAFTA, but it is often said that a president has the first 12 months of his term to enact his agenda and it is no different for Trump no matter how fierce the opposition or supportive his base.




Notwithstanding that it’s expensive and the lip service being paid to “returns” and “profit” by the major shale companies, the land rush into US shale shows no signs of slowing. As long as there is capital to be extracted from careless investors and lenders, the shale companies will take it and make swiss cheese out of West Texas, especially when prices are north of $60.


All of the preceding is a long winded way of saying that we believe that US production will continue to grow and grow significantly. While there is currently some debate as to what US production levels actually are (it is postulated that the EIA is including condensates and higher API liquids in its counts, which is a bit confusing), it wouldn’t be surprising to see the US add between 750,000 and 1,000,000 bpd of liquids production in the coming year, giving an exit production of (depending on what number you choose to add to) of 10.5 mm to 11.0 mm of production. The growth seems almost inevitable when you consider the 3,500 DUCs in the US that are waiting for frac trucks to show up.


In Canada, we see modest growth in production – on par with last year, probably in the order of 250,000 to 300,000 bpd of oil. This will come from both oilsands and the conventional world.


OPEC production levels will depend on what happens with the OPEC production agreement at the various jump-off points through the year. We expect cheating to accelerate as countries like Libya stabilize and Iraq continues to fund its rebuild. The key to the agreement is the Saudi/Russia collaboration which is likely to continue at least until June. If shale growth starts to exceed the top line number referenced above, the Saudis might be inclined to open the taps a bit to rein in prices but there’s that pesky IPO of theirs that needs an elevated oil price. It’s a risky game. I would think OPEC/NOPEC output should be flat year over year.


In the rest of the world, it is highly likely that we will see very limited growth this coming year. New projects are being sanctioned but after three years of relative inactivity, a lot of this is maintenance.


The fact that growth is expected to come primarily from US shale should be concerning for a number of reasons, but mainly because it masks the lack of growth and investment in other regions and being such a capital dependent industry, production can turn negative as quickly as it ramps up. Inventories have come down very rapidly and we have seen over the last few years how difficult it is to reverse that trend once it starts.


Price of oil


This one is the kicker right? The glory call.


I got it mostly right last year and so am feeling a little full of myself. That said, there are conflicting signals all over the place. On the one hand, you have the rapid decline in inventories, the political risk premium, the OPEC/NOPEC agreement and sustained global GDP growth all acting as bullish signals for prices. On the other hand, you have US shale oil production growth, potential OPEC cheating and of course the end of the oil industry as we know it because of electric vehicles all acting to hold prices back. I think the bullish case wins, but I wouldn’t be surprised to see oil prices anywhere between $55 and $75 at any point during the year, with the general direction being up. My year end price is $72.34 with an average price for the year of $67.24. At these levels the Aramco IPO will blow the doors off expectations.


Price of Natural Gas


Ah natural gas, I can’t quit you! Natural gas has been disappointing me and pretty much all of Canada (on the producing side, consumers love this) with lousy pricing for the last two years. Showing great potential at times before collapsing back to “super-cheap alternate fuel why don’t use even more of it” status. Maybe it has something to do with the time of year I’m doing these forecasts – it’s January and -29 Celsius outside (that’s colder than cold for you Farenheiters), which means someone, somewhere is burning a ton of gas so prices should be heading directly up, right? But they aren’t, because we have soooo much gas. That said, US exports are accelerating so there is the potential for supply constraints at some point. But I refuse to fall completely into the trap this time and will temper my enthusiasm. My year end price is going to be $3.66 and the average price will be $3.33. Fingers crossed.


Activity Levels


On the Canadian side, we have late Autumn forecasts for 2018 from PSAC of 7,900 wells and CAODC of 6,138 which represent modest growth over 2017, but still underperforming 2014 by a wide margin. (interesting tidbit – neither  group has the same number for the projected number of wells drilled last year).


With the benefit of an extra few months of news cycles, the OPEC/NOPEC production cut, plus no accountability whatsoever, I will confidently predict that Western Canada will be … flat with last year as E&P companies hold their cards close to the vest while awaiting price stability. I would also note that (oilsands excepted) with Western Canada being a gassier destination, the softness in the gas price is holding back drilling activity from a more American style of excess.


As with last year, The majority of the activity is expected to be concentrated in the Montney/Duvernay/Viking fairway with the balance in Saskatchewan. The emerging East Duvernay tight oil play which I will for fun call the “CanPermian” to see if it sticks will see continued investment this year but is still a ways away from exploitation.


Oilsands activity is expected to be focused on production maintenance and modest brownfield development. Another relatively thin year for Canada’s signature oil play.


Given how monumentally craptacular 2015 and 2016 were for the Canadian oilpatch, these numbers are stellar, but it’s hard not to feel a little tinge of disappointment that we aren’t seeing more of a recovery. I put the blame for that on (in order) low gas prices, a perceived to be hostile regulatory regime in Canada affecting capital and a lack of signature infrastructure projects to boost enthusiasm and hype.


There is no such problem in the US where the rig count is expected to continue to grow. The Permian land rush continues and now, with the majors throwing all their eggs in the dusty West Texas basket, activity levels will be as potent as last year. When you consider that last year US E&P companies spent about $4.3 billion in capex to drill close to 1700 DUCs (wells with no revenue) when oil prices were on average 20% lower, to expect a different result this year would be folly (thanks Art Berman for those stats). The reality is that as long as the cash is coming from Wall Street and the banks, the activity will be growing with it as well and with new tax breaks on capex and loosened regulation brought forth by the Trump administration, the incentive is even greater. Never mind the continuous development of infrastructure such as pipelines and LNG export facilities. Look for the rig count to expand by as much as 150 if prices hold.


M&A Activity


After a solid 2017, M&A in the oil patch is expected to be in full swing this year. And that will be across the board – upstream, downstream, oil, gas, services and everything in between. With oil prices now in the zone and profitability more predictable, expect to see an increasing number of deals happen leading to some pretty big numbers. I will even be so bold as to suggest that we may see some American E&P interest come back into Canada – crazy I know, but I did say it was a “fearless” forecast.


On the services side, we still like infrastructure and see that as an area where Canada could see a fair amount of consolidation.  Other areas that should see some activity are in the oilfield transportation area (fluid hauling, etc.) and pretty much anything completions related as the market looks to make a dent in the massive DUC inventory.


Canadian Dollar


The Canadian dollar should see some relative strength this year with the commodity price, but headwinds such as the pending demise of NAFTA, trade disputes and the national carbon pricing strategy may hold it back. Starting the year at about $0.80, the dollar could easily trace down to $0.75 or up to $0.85. It’s a good bet for weakness through the summer and a rally on the back end of the year.




Okay folks, get ready for it because this is the year. That’s right, this is the year that some infrastructure may actually get started. I’m going out on a limb and am going to forecast the following: Keystone XL and TransMountain will make significant progress and there will be a positive LNG surprise before the year is out. I don’t know what it is, but it will happen.


Stock Picks


While last year was a bit of a wash for my picks in general, at least I outperformed the benchmark. So I didn’t lose as much as I could have. Winning!


True to my rules, this year I pick two Canadian E&P’s – one gas’ish-weighted and one oily as well as two service companies and, finally, one American producer and one American service company.


Here goes nothing…


On the Canadian oil and gas E&P side, I am going old school and picking two estranged brothers/sisters both of whom made transformative, aggressive and, in many people’s opinions, over-valued purchases at precisely the wrong time. At least that is what the stock market said. On the operational side, many people thought the strategies kinda made sense.


So I pick Encana and Cenovus, once two peas in a pod and soon to be either a millstone around my neck or picks of sublime genius.


On the large cap Canadian service side, I am going to pick Calfrac Well Services. Calfrac is one of the largest frac companies in North America and trades at an insane discount to its US peer group. And I did say completions, right?


I don’t have a small-cap pick this year since I expect to get all my growth from the commodity producers, instead I am going old school with the portfolio and picking a high dividend paying boring infrastructure company – Inter Pipeline. Yawn, right? But a 6.5% dividend works OK for me (note – that’s really high) and as one of the few Canadian companies actually building infrastructure here in Alberta, a homer and growth play.


In my search for a US producer, I decided to go with a familiar name – Anadarko. Anadarko is one of the US majors that has suffered the most in the last few years but is poised to deliver that rarity among US E&P companies – Free Cash Flow.


On the service side, I am going back to completions (so many DUCs!) and picking a company called Eco-Stim Energy Solutions. As per their own info they provide well stimulation, coiled tubing and field management services to the upstream oil and gas industry and focus active shale and unconventional oil and natural gas basins inside and outside the United States. They currently operate in Argentina and Oklahoma. There’s technology involved as well, sadly not blockchain, but one can always hope.


That’s it! Fearless? Sure. Crazy? No doubt. Food for thought? I hope so.


A few final predictions in the quick fire round…


NAFTA–  Done


Indictment – Don’t be silly


Impeachment – Not a chance


Super Bowl – New England.


Stanley Cup – Winnipeg


US Mid-Terms – Most people are predicting a big blue wave, but I see it tighter than that. I think the Dems get control back but not massively. They still have no message except “we are no longer Hillary and we are definitely not Trump.”


Have a great year.


Prices as at January 12, 2018 (January 5, 2018)

  • The price of oil continues to show strength into the New Year on inventory draws, demand and political upheaval.
    • Storage posted big decrease
    • Production was adjusted downward by a significant amount
    • The rig count in the US was up by a rounding error
  • On the back of a deep freeze and the biggest withdrawal in recorded history, natural gas keeps trying to rally – up marginally…


  • WTI Crude: $64.30 ($61.55)
  • Nymex Gas: $3.20 ($2.790)
  • US/Canadian Dollar: $0.8024 ($ 0.8062)



  • As at January 5, 2018, US crude oil supplies were at 419.5 million barrels, a decrease of 4.5 million barrels from the previous week and 63.6 million barrels below last year.
    • The number of days oil supply in storage was 24.2 behind last year’s 28.8.
    • Production was down for the week by 290,000 barrels a day at 9.492 million barrels per day. Production last year at the same time was 8.946 million barrels per day. The change in production this week came from an increase in Alaska deliveries and a big decrease in Lower 48 production. I would note that for the record, if this adjustment to US production had been made five days earlier, my original US production forecast from last January would have been almost exactly right. Just saying.
    • Imports fell from 7.966 million barrels a day to 7.658 compared to 9.052 million barrels per day last year.
    • Exports from the US fell to 1.015 million barrels a day from 1.475 and 0.727 a year ago
    • Canadian exports to the US were 3.377 million barrels a day, down from 3.524
    • Refinery inputs were down during the week at 17.323 million barrels a day
  • As at January 5, 2018, US natural gas in storage was 2.767 billion cubic feet (Bcf), which is 13% lower than the 5-year average and about 12% less than last year’s level, following an all-time record implied net withdrawal of 359 Bcf during the report week. To put this in context, withdrawals have been higher than 249 Bcf only 10 times since 1993 and have nnever exceeded 300 Bcf.
    • After the big withdrawal of the past week, overall U.S. natural gas consumption was down 14% during the week ending January 10, influenced by warmer weather
    • Production for the week was flat. Imports from Canada were down 20% compared to the week before. Exports to Mexico were up 2%.
    • LNG exports totalled 10.4 Bcf.
  • As of January 8 the Canadian rig count was 289 – 199 Alberta, 24 BC, 59 Saskatchewan, 7 Manitoba. Rig count for the same period last year was about 270.
  • US Onshore Oil rig count at January 5 was at 752, up 10 from the week prior.
    • Peak rig count was October 10, 2014 at 1,609
  • Natural gas rigs drilling in the United States was up 5 at 187.
    • 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 2 at 19
    • 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%



  • Alberta’s United Conservative Party floated a policy paper proposing to repeal the carbon tax, bring back the flat income tax, roll back corporate tax increases, change the funding model for schools and and introduce some private care in the health care industry. Needless to say, the NDP were less than impressed
  • Trump Watch: In an otherwise uneventful week, Donald Trump managed to insult the United Kingdom, Haiti, the Dominican Republic and most of Africa..
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