Crude Observations

Fishing for Easter?

Well, here it is. Time for a long thought out and serious decision. I have elected, after much determination, consternation and consultation with friends, family, colleagues, the leaders of the seven major world religions and numerous governmental bodies to make this edition of the blog, being Easter Sunday, April 1 2018 on or before 11:59 AM Mountain Standard Time the last. It’s been a good run, but with the energy sector in such good hands, I think the timing and reason for the end is obvious. I have nothing left to add to the discussion.


OK, well I’m glad I got that Easter surprise out of the way, now on to the fun stuff, right?


Wow – hard to believe a quarter has gone by so fast, yet here we sit, three months into the new year and we still haven’t got a clue how things will unfold. Fortunately, we have my Fearless Forecast to rely on or make fun of – it’s really a free choice.


But before we do that, let’s have a digression about “forecasts” and how they take time to fully flesh out. I say this without having actually looked at my forecast or the results, secure in the knowledge that there will be both wisdom and disaster embedded in all that I have tried to prognosticate.


Except my NCAA picks. What a disaster.


Now, on to the forecast review/report card. I am hoping for a passing grade but am secure in the knowledge that I have time to make up ground. I only hope it’s enough to get me into Prognostication Grad School at some point so I can complete my PhD in hocus pocus.


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 seem to have things relatively under control thanks to elevated oil prices and as yet muted conflict on their various proxy confrontations. That said, with the ascension of Iran Uber-hawk Mike Pompeo to Secretary of State. There is much concern that the coming few months will see the re-introduction of sanctions on Iran by the United States and the unravelling, at least in part of the nuclear deal which would most certainly destabilise the region. Add to this the increasing instances of missiles emanating from Yemen over Sausi Arabian airspace and an increasingly militarily focused leadership in the kingdom (just look at the massive weapons deal recently announced with the United States) and it is hard to imagine anything but rapid escalation of tensions. As this happens, reforms get ignored, civil liberties curtailed and the squeeze gets put on younger populations at the economic margin – and we all know where that leads.

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 finally appears that the rest of the world is beginning to take notice, at least insofar as the oil price is reflecting the collapse of the Venezuelan oil industry which will take decades to reverse. In the meantime, the population starves and the Maduro government clings to power in a desperate attempt to avoid jail or worse from the inevitable popular uprising. At some point the army will change sides and all bets will be off. It will at that time remain to be seen whether the country improves or not under switcheroo dictatorships but all things considered, it’s hard to imagine it being much worse. Much will depend on whether Russian, Chinese or American influences gain the upper hand. My money is on China – they have the most to lose given they have been propping up the country for some time and they want the oil.

Grade C – can’t get full marks for stating the obvious, this is like 1 x 1 on a math test.


Technology. OK, so maybe I don’t really understand what it is but I did say that Blockchain was going to be an emerging force in the energy sector as the year progressed. If media blather is anything to go by, it’s already well away as scarcely a day goes by woithout some new breathless article about how technology and blockchain is changing the energy world. A quick google search gave me more than one million hits on “Blockchain oil and gas” and I even found a conference I will be going to! Well probably not, but I could if I wanted to. Grade B – look, it’s happening.


On the energy front my forecast had an evolving story over the course of 2018 centered around a day of reckoning from at least three years of massive underinvestment in non-OPEC, non shale resources. While this hasn’t played out in plain view the warning signs are there. As discussed here just last week, there is a growing concern regarding crude quality as light tight oil has a limited market. In addition, Mexico, Brazil, Russia, Southeast Asia and other key regions are underperforming their asset bases and beginning to show some of the effects of this underinvestment. 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. Such is the effect of surging global demand. Heck, even LNG markets are getting tight!

Grade C – Emerging


Fortunately, we have the cure for the demand side of the equation and, to a certain extent, the supply side as well residing in a drafty old white shack just a short jaunt south of the border. I am referring of course to my worst forecast so far (I do have a ways to go), namely that I expected Donald Trump to be more “benign” in 2018 than the tumultuous year we saw in 2017. Nope. Wrong on that front. Continued belligerence on NAFTA, tariffs on steel and the opening of a trade war with China are just a few of the major economic developments to emerge from the executive branch over the last few months. The upcoming trade conflicts have a very serious possibility of spreading, upsetting the benign economic conditions we have been enjoying, raising prices and inflation across the board and 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 then it is a long year and mid term elections are coming. May the “average” will be right? One can only hope.

Grade F – needs work.


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.




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 10.433, although after year end, production was adjusted up be some 270,000 barels per day so the real stating number is somewhere above 10 million.

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 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. In fact, with Venezuela production taking it on the chin, OPEC production is underperforming expectations, cheating is limited and their influence in the market is fairly limited right now. With a rumoured twenty year deal between Saudi Arabia and Russia to manage oil markets emerging, it looks like discipline will be tightly maintained.


Price of oil


This one is the kicker right? The glory call.


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 the quarter are $64.91 as at March 31 and an average of $62.89.


Clearly oil prices need to step up a bit to hit the call but so far so good. Unless the electric vehicle revolution takes off like stink and demand disappears overnight.


Grade – B, but the jury is still out.


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 decade. Super cold winter, massive snow falls, larger than normal withdrawals from storage, 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 March 31 price was $2.733 and the average was $2.85. And now summer is coming. Whatever. There’s always the fall right?


Grade D – need a better call.


Activity Levels


I predicted 2018 activity in Canada was going to be flat compared with 2017 and Q1 certainly did nothing to dispel that impression. Soft gas prices, no LNG, uncertainty in BC and a general lack of enthusiasm for Canada in the investment community have held back activity, in particular in BC where activity levels have been surprisingly weak. And now we are in Spring breakup. I do hold out hope for strength in the latter half of the year. Still too early to tell what is coming. Activity cojntinues to be concentrated in the Duvernay and the Bakken. The CanPermian (East Duvernay) is getting a lot of media hype but isn’t on fire yet.

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 – which of course is reflected in my miss on production. I did not predict the current plateau in rig count, but then my commodity forecast was initially a bit more aggressive. Expect some rig count growth into the new year based on the forward curve, but not as smartly as the same period last year – capital and materials are scarcer, and the brace of DUC’s needs to be culled.


On the US side, we all know the story. The Texas land rush is in full force and the Permian basin is seeing a crush of activity. That said, the rig count appears to be relatively stable with any growth fairly muted. The DUC inventory continues to build but more and more frac crews are coming on stream to address this duck/back/fracklog. 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. We are certainly seeing that in the E&P space in the Permian in particular (really? Quel surprise!) with some major deals and portfolio reshuffling happening as existing players double down on sweet spots and majors consolidate their positions. In Canada activity has been fairly muted as the black hole of the Permian continues to suck up all the spare investment interest and media coverage.


Also predicted was a US return to Canada at some point – I will stick to that, but it may not happen until way later in the year.


On the services side, we thought that activity would pick up and it most certainly has with a number of deals being completed both north and south of the border a trend that is expected to continue.


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 the national carbon pricing strategy may hold it back. So far so good. The Canadian dollar is a mess, trading below $0.78 and likely to show no signs of life until this NAFTA gong show is resolved.

Grade B




So this of course is the one we all talk about – well 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. Could it actually be? Maybe. But with TransMountain bulldozing over obstacles thanks to the NEB (note: obstacles, not protestors, because while no doubt satisfying, that would be bad) and now Premier Horgan sweetening the pot for LNG Canada, there is reason for guarded optimism on this front. Although, as per last week – TransCanada, what are you waiting for?

Grade A – maybe a reach, sue me


Stock Picks


OK, energy and energy related stocks have been eviscerated for most of the quarter, but I’ve got some decent names, so how bad can it actually get?


Answer? Really bad.


So how do we look anyway?


Overall the portfolio is down 9.6% but is ahead of its benchmark, which is down 10.2%. So outperformance – yay!


But some of these guys really crapped the bed – like Eco-Stim? What up with that? Might have something to do with it being basically an OTC stock but I digress.


Look, I’m willing to be patient here. How about you? I think this portfolio is well set up for the next three quarters and how about we all have a nice shout out to Anadarko, with a more than 10% return in the books. Well played!


Stock Jan-01 Mar-31 % Change
Encana 17.17 14.17 -17.5%
Cenovus 12.18 10.97 -9.9%
Calfrac Well Services 6.17 5.89 -4.5%
InterPipe 26.13 22.36 -14.4%
Anadarko 54.54 60.41 10.8%
EcoStim 1.22 0.95 -22.1%
Average -9.6%
TSX Capped Energy 197.43 177.38 -10.2%
*Not currency adjusted


Grade C – outperformance but crappy performance regardless. Sigh.


A review of the quick fire round…


NAFTA –  Done – hmm, work in progress


Indictment – Don’t be silly – right so far!


Impeachment – Not a chance – again, well played.


Super Bowl – New England. The GOAT was a goat.


Stanley Cup – Winnipeg – can’t be wrong as long as the palyoffs haven’t started!


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.” Sticking to this.


Overall Grade? C+, it’s all a work in progress after 1 quarter.



Oh, and that whole prelude? Come on. April Fool’s! You can’t get rid of me that easily.


Prices as at March 30, 2018 (March 23, 2018)

  • The price of oil fell during the week on a fairly bearish storage report.
    • Storage posted a large draw
    • Production was up marginally
    • The rig count in the US was mixed
  • After a larger than expected withdrawal, natural gas recovered a bit from a steep fall…


  • WTI Crude: $65.91 ($65.91)
  • Nymex Gas: $2.587 ($2.587)
  • US/Canadian Dollar: $0.7786 ($ 0.7786) – Really? I’m on VACATION!!!


  • As at March 23, 2018, US crude oil supplies were at 429.6 million barrels, an increase of 1.6 million barrels from the previous week and 104.1 million barrels below last year.
    • The number of days oil supply in storage was 26.1 behind last year’s 33.9.
    • Production was up for the week by 26,000 barrels a day at 10.433 million barrels per day. Production last year at the same time was 9.118 million barrels per day. The change in production this week came from a increase in Alaska deliveries and a slight increase in Lower 48 production.
    • Imports rose from 7.077 million barrels a day to 8.148 compared to 8.224 million barrels per day last year.
    • Exports from the US rose to 1.578 million barrels a day from 1.573 last week and 1.010 a year ago
    • Canadian exports to the US were 3.477 million barrels a day, up from 3.423
    • Refinery inputs were up during the week at 16.795 million barrels a day
  • As at March 23 2018, US natural gas in storage was 1.383 billion cubic feet (Bcf), which is 20% lower than the 5-year average and about 33% less than last year’s level, following an implied net withdrawal of 63 Bcf during the report week
    • Overall U.S. natural gas consumption was down 4% during the report week, influenced by weather
    • Production for the week was flat. Imports from Canada were down 6% compared to the week before. Exports to Mexico were flat.
    • LNG exports totalled 18.2 Bcf.
  • As of March 26 the Canadian rig count was 163 – 139 Alberta, 8 BC, 14 Saskatchewan, 0 Manitoba and 2 elsewhere. Rig count for the same period last year was about 270. Warm weather an spring breakup has impacted activity levels.
  • US Onshore Oil rig count at March 29, 2018 was at 797, down 7 from the week prior.
    • Peak rig count was October 10, 2014 at 1,609
  • Natural gas rigs drilling in the United States was up 4 at 194.
    • 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 12
    • 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%



  • Nothing fun this week – Oh, Ontario budget. If you thought Alberta was a fiscal disaster, wait until you get a load of this mess.
  • Trump Watch: Stormy Weather. Spring Break. Not checking tweets. Feel so much more sane.
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