Crude Observations

Jumpin’ Jack Flash

Well it sure has been a tough couple of months for those of us in the oil business as prices have taken it on the chin and it seems even kindly old grammas that you help across the street are swatting at us with their umbrellas.


I know I talked about this last week, but the turnaround has been so rapid, that it is really hard to talk about much else. That said, I am glad to see that markets have stabilized, for now, and OPEC and Russia seem to be ready to cut production and exports, again and that the 1 million barrels per day of US refinery capacity that has been offline for turnarounds is finally coming back online, led by the Canadian heavy oil sucking BP Whiting refinery.


Alright, enough of that oil stuff. Time to move on to a more exciting topic. What’s that you say? Well, I guess maybe, just maybe, without jinxing anything of course, we could perhaps talk about… natural gas? It’s a gas, gas, gas.


Yes, natural gas. My favourite chronically underperforming commodity. The bane of my carefully crafted portfolio’s existence. Why natural gas? Well, while oil prices were cratering from the lofty peak around $70 and settling around $55 wouldn’t you know it but that sneaky NYMEX natural gas price went on a veritable tear, rising from $3.10 to close over $4/MCF the other day, rising past $4.50 before settling back at $4.30. That’s a whopping 30% increase in a very short time.


Why does that matter?


Well, this is pretty significant. It is the first time I believe that the Nymex price has breached the $4 mark for more than a year. In Canada it has been much longer since we have seen strength in natural gas, so as these prices spill over into Canada (as they must) this will provide a much needed shot in the arm to the natural gas sector. And need I remind you (yes I need to) that natural gas was at one time the runaway leader of the pack in the Alberta energy sector, contributing as much in royalty revenue as the oil sands ever did and allowing Ralph Klein to, you know, pay off the province’s debt and distribute random cheques to the people of Alberta long before Trudeau ever contemplated it.


Anyway, the prices haven’t spilled over as of yet, but there has been some positive momentum so fingers crossed, right?


So what happened? Why the spike? Was there a crossfire hurricane?


The rise in natural gas prices is the result of a confluence of factors, but at the end of the day the main drivers of prices in the American natural gas market are supply and weather. As those of you who read this blog know, I publish the weekly storage numbers (you knew that, right?) in order to track what are called injections and withdrawals from storage. Basically in the US there are two discrete natural gas seasons – injection season is generally in the summer when demand is lower so excess production is injected into storage for later us. This of course rolls over into “withdrawal” season, or winter, when home heating demand in key markets accelerates and the built-up stores of natural gas start getting drawn down.


Well in the past few weeks as we approached the end of injection season, a number of people finally appear to have noticed what I have been pointing out for some time (OK, not just me). Namely that we are finishing the injection season some 17% below both last year’s storage as well as a similar amount behind the five year average. Looked at another way, despite record levels of production, the amount of gas in storage at the end of the injection season was the lowest it has been since 2006. That’s 13 years. Wow. Now this may seem not a big deal given the trillions of cubic feet of gas are actually in storage, but for a market that operates pretty much “in balance”, any material aberrations from the norm – whether it’s storage, demand, production – can have a significant impact on prices. Don’t believe me that storage matters? Ask anyone who has been following the oil market for the past five years.


At any rate, slower than usual injections, higher than expected demand during the summer, lower stockpiles and, presto, a sudden cold snap in the Midwest and you’ve got $4 all day long.


How significant was the swing? Well a number of hedge funds that were long on oil and short on gas at the same time saw their asset values destroyed over the past few weeks. Big names too.


Back to the task at hand. On the surface, this may seem like a one-time thing that the mighty Marcellus will cure forthwith, but I would argue that we may finally be in the early stages of a gas bull market.


And I say this for a number of reasons, some of which I have cited before that now bear repeating.


On the demand side, US gas consumers have been growing consumption steadily over the last several years with significant increases in industrial activity from a booming economy, more degree cooling days due to global warming which has increased summer demand and the well-documented switch from electricity generated by coal to cleaner burning, still cheaper, prolific gas.


Now before we get carried away, it’s worth remembering that the great gas price crash of 2006-07 was caused by this little thing called fracking and shale gas. That is the massive gas deposits unlocked in plays like the Barnett, the Haynesville, the Woodford, the Marcellus and the Utica. These finds were so prolific that they reversed what had been a secular decline in natural gas production in the United States  and single-handed rescued gas consumers and altered continental gas flows, including those from Canada, if not permanently, then for at least the better part of a generation. The flip side of this of course was a crashing of prices, from close to $10 per Mcf down to the range we have been living for a decade.


Notwithstanding the massive initial production, many of these plays have slowed significantly such that over the last year or so, the only play with significant production growth and profile was the Marcellus. In fact, the Marcellus now represents a third of share production and just over 20% of total US gas production. Adding to the production profile for natural gas in the United States is a significant amount of gas produced in the Permian and the Eagle Ford. While much of the discussion about Texas gas is about flaring, a significant amount makes it into the transportation infrastructure.


So, production is significant and prolific, but one of the points I have made on occasion to anyone who would listen is that when thinking about gas, it is critically important to not only pay attention to domestic production and consumption, but also understand what is happening on the export side. And in this instance, the Americans are doing the whole world a favour by exporting as much of their natural gas bounty as they can. Over the last few years the United States has brought online new LNG capability and is about to commission a second transportation pipeline into Mexico. Taken together, these account for close to 10 billion cubic feet a day, or just about 12% of production. With much, much more to come. An LNG export facility was just commissioned in Texas this week.


Now, this isn’t a problem when production is growing at an accelerating rate, but those are a lot of chips to put on the line in Pennsylvania. Look, I’m not predicting any kind of crisis, the market is well supplied and quite orderly but all it took was an explosion on a pipeline in the BC Interior to send spot prices for natural gas in Washington over $10 per MCf. And shale is shale. Depending on one basin to provide all the growth in supply and exporting 20% of production seems a bit mad to me.


Final point – increased exports, a smoothed out consumption cycle where the line between injection and withdrawal season becomes more blurred, continued replacement of coal with gas and an over-reliance on one source for production growth – these are all signs that the continental market for natural gas is undergoing a bit of a transformation.


What’s in it for Canada? Do we have to continue to suffer like we were raised by a toothless, bearded hag?


In the short term while the US is well supplied in the mid-continent and Enbridge works furiously to get its line back up in BC? Not much. Maybe just some wind in the pricing sails.


Longer term, this is all bullish for Canada. Canada is the 5th largest producer of natural gas in the world and is arguably in the top 10 in terms of reserves. We have the capacity to produce copious amounts of natural gas, well in excess of what we need and we are home to a massive interconnected pipeline system that connects us with our one and only current export market – the US. Unlike with oil, the United States gets more than 95% of its natural gas imports from Canada and the prices received are for the most part close’ish to market. We also have the ability to send natural gas all the way to Eastern Canada via the as-yet to be repurposed TransCanada mainline. While gas shipments that way have declined over the last decade as the big Eastern markets sourced their gas from the United States, there is nothing in the way of restarting this should US supply falter, or be redirected elsewhere.


I guess what I’m saying is that once we were a big deal in gas and then that was replaced by oil and it stands to reason that at some point the pendulum swings the other way again.


As it regards what the realm of the possible is for gas in Canada, you have already seen the future. The LNG Canada project when built will absorb all the surplus gas production in Canada and then some.  And at least we have approved this project and its pipeline. This gas is going to come from the Montney, the Horn River and the Liard Basins. While the latter two are in BC, the Montney straddles the Alberta/BC border. The gas for the LNG Canada plant is ultimately going to largely come from BC regions but gas is fungible and not subject to as many quality comparisons as oil and where BC production gets diverted to the Coast, the other traditional customers will require gas to fill those gaps and that will come from Alberta and to a lesser extent Saskatchewan. Throw in a shale meltdown or two, a couple of extra LNG projects, some rising demand in Eastern Canada and it’s hard not to make the bullish case for natural gas in Canada.


Maybe it’s a pipedream. Maybe I’ve been inhaling the product. But dangle a  shiny natural gas rally in front of my eyes in the face of all this bad news and I can guarantee you: I AM BUYIN WHAT YOU SELLIN! Better than the strap right across our backs we’ve been enduring.


And now, a quick public service announcement.


Please. Please. Please. Stop with all the suggestions about getting the government of Alberta to mandate a shut-in of production in the province to address the current wide differential.


Top Reasons:


  1. This isn’t the 1980s. Things are different now. We aren’t fighting a political battle and the market is way more complex.
  2. Companies that are impacted by the big differentials are already shutting in production. So far to the tune of 150,000 barrels per day
  3. Crude by rail is ramping up rapidly, adding another 100,000 barrels per day of capacity by Q1 / 19
  4. The refineries that were in turnaround are already coming back online and they need heavy oil
  5. The new Sturgeon refinery should be processing upwards of 50,000 barrels per day of bitumen by the end of the year
  6. Timing – by the time government fiddle-f’s their way to implementing anything, the market will have solved the problem. Differentials are already tightened to below $40.
  7. Line 3 by Enbridge is well under way. The above will keep us afloat until then
  8. Do we really want to discourage more investment? Hey – let’s go put our money into a jurisdiction where the government can shut in production…
  9. To paraphrase Reagan – We’re from the government and we’re here to help – umm, no thanks
  10. Precedent, precedent, precedent. We’ve already handed the government a hammer over production by giving them the 100 megatonne cap, do we really want to give them the ability to turn the taps off? Can we really trust some future government not to pull this out of the toolbox at the absolute worst time to serve some environmental agenda? Or the Federal government or some future BC Green/NDP proportional representation abomination taking their lead from Alberta?


Enough of this nonsense. Let the market do what it has to do.


Unless… Unless…


Maybe the producers can all get together and agree on voluntary cuts. I am thinking in the order of 25% to 33%, which would materially drop the level of imports into the US, immediately solve the differential issue, completely violate NAFTA and get the immediate attention of the Man in the High Castle. You probably only need to do it for a week before the phone calls to Trudeau come off the top rails and the invocation of national security gets some pipelines moving. Sure it’s collusion and illegal, but sometimes you gotta do what you gotta do when you’ve been drowned, washed up and left for dead. I give it two weeks before it was alright now, in fact it’s a gas…


Prices as at November 16, 2018, (November 9, 2018)

  • The price of oil fell precipitously during the week on a combination of supply build, Iran, Trump tweets and stock market jitters.
    • Storage posted another big increase
    • Production was up
    • The rig count in the US was flat
  • After a larger than expected injection, natural gas was still up for the week…
  • WTI Crude: $56.77 ($59.80)
  • Western Canada Select*: $20.48 ($16.18)
  • AECO Spot *: $2.55 ($3.20)
  • NYMEX Gas: $4.359 ($3.721)
  • US/Canadian Dollar: $0.7606 ($0.7681)

*Due to overwhelming interest, we are now including prices for Canadian commodities, in case you weren’t angry enough.


  • As at November 9, 2018, US crude oil supplies were at 4442.1 million barrels, an increase of 10.3 million barrels from the previous week and 16.9 million barrels below last year.
    • The number of days oil supply in storage is 27.0 compared to 28.3 last year at this time.
    • Production was up during the week at 11.700 million barrels per day. Production last year at the same time was 9.645 million barrels per day.
    • Imports fell from 7.539 million barrels to 7.432 million barrels per day compared to 7.898 million barrels per day last year.
    • Exports from the US fell from 2.405 million barrels per day to 2.050 million barrels per day last week compared to 1.129 million barrels per day a year ago
    • Canadian exports to the US were 3.296 million barrels a day, down from 3.507
    • Refinery inputs rose marginally during the during the week at 16.432 million barrels per day
  • As at November 9, 2018, the traditional end of injection season, US natural gas in storage was 3.247 billion cubic feet (Bcf), which is about 16% lower than the 5-year average and about 14% less than last year’s level, following an implied net injection of 39 Bcf during the report week
    • Overall U.S. natural gas consumption was up 27% during the report week on colder than normal weather
    • Production for the week was flat. Imports from Canada were up 19% from the week before. Exports to Mexico decreased 1%
    • Deliveries to LNG plants for the report week were 4.3 Bcf per day. There are now 5 trains operating a Sabine Pass, one at Cove Point and and now a new train at Corpus Christi. Here in Canada we are of course still waiting.
  • As of November 16, 2018, the Canadian rig count was 197 (AB – 137; BC – 15; SK – 39; MB – 4; Other – 2. Rig count for the same period last year was 208.
  • US Onshore Oil rig count at November 16, 2018 was at 888, up 2 from the week prior.
    • Peak rig count was October 10, 2014 at 1,609
  • Natural gas rigs drilling in the United States were down 1 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 up 1 at 22
    • Offshore peak rig count at January 1, 2015 was 55
  • US split of Oil vs Gas rigs is 80%/20%, in Canada the split is 65%/35%


  • The BP Whiting refinery is finally restarting. Hurrah!
  • Trump Watch: Things seem gloomy in the White House post mid-terms. A Mueller report seems to be coming. Oh, and something about reporters not being nice.
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