Crude Observations

No One Fails in June Right?

Arg. Another half year in the books in this wild and woolly industry we all love so much. What with the past two weeks celebrating birthdays of people and countries, a guy could be forgiven for not taking stock of where his accumulated wisdom sits. Unfortunately, the day of reckoning is at hand.


That’s right – mid-term exams have been graded. It’s Q2 report card time. And as I sit here, reluctant to actually look at anything I predicted or thought, I figured I would try something new, because, why not? Instead of just preparing a forecast at the beginning of the year and then assessing actuals versus that forecast, what I’m going to do, right here and right now is (drum roll please) forecast how I am doing with my forecast before checking my forecast and then forecasting how my forecast will ultimately grade out at the end of the forecast period.


Are you following along?


So here it is – my fearless prediction as to how I am doing so far? A C. That’s right. The middle of the pack. Why a C? Because everything is taking too damn long to happen. And I have already bailed on my oil price forecast. Pretty sure the flashing F on stock picks will be enough to drag down any accidental brilliance. Let’s see if the numbers bear out my pessimism as to my performance.


End of year? I think there is a fair to middling chance this average performance can be brought up to a … B-?


So, with that obviously encouraging preamble dealt with, let’s see how the numbers play out.


Broad Themes


As you may or may not recall, I had a number of broad macro themes in my forecast, some of which are real softball, easy-peasy to hit.


First of these was a prediction that the popu-nationalism that gave rise to Trump and Brexit would in fact crest and fade over the year. Well, that sure worked out thanks to Emmanuel Macaron (what? Oops!) Macron in France and his neo-liberal party and Teresa May in the UK and her remarkably poor electoral judgement which ended up losing her a majority government and her position of leadership in the Conservative Party, not to mention resuscitating a left for dead Labour party. Oops.


I suggested we would see action on trade and regulation from the Trump administration and this is starting to happen, for sure it’s coming in the next two weeks.


On the security front, I expected a rapprochement of sorts with Russia (too soon to tell with all the election nonsense) but there is going to be a G20 bromance-a-thon next Friday. I have chills.


Turkey was underlined as a global flashpoint given its historic position as the intersection of cultures and I stand by that given the tensions across the region. Turns out I should have said Qatar. Who knew? Six months to go though.


The final theme was the “cresting” of the green wave and how the Trump election was a disaster for the environmental movement. Ah, predictions, how do I love thee, let me count the ways: Dakota Access, Keystone XL, the declawing of the EPA, the rollback of Obama climate and energy regulations and an “energy plan” targeting dominance – nice. Of course in Canada we are racing backwards as much as possible, but there is still hope for us.


Broad Theme Grade – B+. Why? The year isn’t over yet.




First call was that OPEC/NOPEC would meet their production cuts and indeed they did as did Russia. I believe compliance was at 98% across the board so that is a good thing.


Non-OPEC production was expected to be flat year over year so we will wait in that result.


I predicted the US would add 300 to 400 thousand barrels a day of production in 2017. This is for sure going to be light, but it’s still hard to get to the 1.2 million plus additions some are predicting. I did raise my top end to 600,000 barrels a day in my last report card. As at June 30, US production growth for the year was 568,000 barrels a day. It’s entirely possible another 400,000 barrels can come on stream in the next 26 weeks, but that entails a lot of completion work, which actually appears to be the bottleneck right now. Lots of drilling though and the DUCs are taking flight. Let’s see the year end number, but I admit defeat on this one, the rig count recovered way faster than anticipated and I failed to account for sizable offshore additions to production. That’s a D folks!


Canadian production was expected to post modest growth as well. At December 31 , 2016 Canadian production of crude and condensate was 4.156 million bpd and at June 30 it was projected to be 4,029 million bpd. However a lot of oilsands production was down in Q2, so the jury is out. Consensus has Canada growing by about 400,000 bpd this year. Based solely on the data, the grade is a C.


Price of oil


So, as part of my new full-disclosure package, I adjusted my oil price forecast on the fly and am now targeting a year end price of $56 instead of $65 and a trading range between $45 and $55. I didn’t pick an average price, but I suppose if I have to, I am going to say $48.97.


Imagine, 3 months ago I loved my forecast, now I can’t even look at it anymore. Love can be so transient.


As of June 30, the price of oil was $46.04 and the average price for the year to date was $49.96.  The period high was $54.45 and the low was $42.53. Grade B for the first 6 months. Otherwise pending.


Price of Natural Gas


Ugh, someone pass the Pepto – we have gas. Lots of gas. Can we just get on with the flaring already?


My prediction that gas would be a key commodity this year is looking, well, about as smart as a bag of hammers. I still believe in the gas story long term as generation switches over and export facilities and pipelines get built but it may take a while longer. There’s just a lot of gas. That said, we are in injection season and even that isn’t setting the world on fire. That said, if you like stability in your commodity price, this seems to be the place to be with prices seemingly unable to break free of that $3 mark.


My year end prediction was $4.50, which “in theory” could still happen, although as a theory it isn’t receiving a whole heck of a lot of peer review. My average price of $3.50 can in theory happen as well, like if something catastrophic happened to supply. But low gas prices this far into the year will make it hard to get to where I predicted.


As for a revision? Well I already bailed on oil so I have to stick somewhere, it may as well be gas. For the record, if I could change, it would be to $3.75 year end and an average price of $3.25 for the year.


Price at the end of June was $3.035 and the average for the period was $3.102. But gas traded as low as $2.50, in the winter. And that is a problem.


Grade is a C because we are holding north of $3, but I suspect year end won’t be pretty.


Activity Levels


I predicted a robust 2017 in Canada with activity concentrated in a barbell fashion – Montney/Duvernay/Viking and then quiet all the way to the Bakken with the activity happening in Q1 2017 and resuming later in the summer. The first quarter was bang on and these areas were super busy. My prediction was based on number of wells so still too early to tell. But given current levels of activity are way ahead of last year and CAPP, PSAC and CAODC are all revising their projections upward, I’m thinking we are looking OK.


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 back at work.


Grade B+. Directionally right for North America, close for Canada, underestimated the US.


M&A Activity


I predicted for the year that M&A activity would pick up, definitely in the service sector and to a lesser extent in the E&P world until later in the year when I expected a rebound. Great call on the service companies, especially in Canada with three major public deals having occurred in the upstream service world. Given the work volume we are starting to see in our shop, we expect more M&A activity to accelerate over the summer both in upstream services and in construction and infrastructure. Another flavour of the moment is outbound Canadian M&A activity as companies look to partake in the gravitational pull that is Texas.


A little less spectacular on the E&P side, where the words “swing and a miss” come to mind for the whole “pause” thing. I guess when it’s time to rotate out of the oilsands, it’s time to rotate out of the oilsands! I still think there will be rebound activity into Canada later in the year as the US continues to trade at premiums that seem too high, especially versus the Montney and Duvernay.


Grade – C. Right call on service, whiff on E&P, so far.


Canadian Dollar


My call was for the dollar to trade around 75 cents for much of the year – held back by lower oil prices and US Fed rate hikes. This certainly seems to be the case, although recent GDP numbers and noise from the Bank of Canada about tightening pushed the dollar up to the 77 cent range for a spell. I would argue that we are in this static range for a while. As noted in the forecast, a significant rally in oil could bring us closer to 80 cents, and that is still possible by the end of the year.


Given I am currently planning a vacation o the US, this, as they say, is a problem.


Grade: A. Because I was right.




Look, I know my prediction that KXL and TransMountain would both get under way in 2017 looks pretty shaky right now given TransCanada is waiting for approval in Nebraska and the TransMountain line is now being threatened by the new “government” in BC, but I still think it’s a fair bet construction is going to start. I thought KXL might go first and placed a bet on it. No one took me up – I think I might have lost that one. I think TransMountain starts on schedule in September.


After the BC election, I was pretty sure that Pacific Northwest LNG was dead on arrival due to the new fossil fuel hostile government in BC. I mean seriously, why would Petronas continue to shell out cash for a project that the provincial government doesn’t seem to want the benefit of. But then the new NDP Premier Horgan gives an interview where he says he supports LNG – with “conditions”. Well which is it? Does Andrew Weaver know you’re planning on selling out the environment?


Grade: Pending.


Super Bowl


Kansas City over Green Bay? Really? What in the world was I thinking? Grade: FFF


Stanley Cup


Montreal Canadiens. Oh come on! What a disappointment. I can’t even get the satisfaction of seeing PK Subban lift the cup after his getting shuffled off to Nashville. Maybe next year? Grade: F



Stock Picks


OK, here is where the rubber hits the road. If you thought the above was problematic, this could get ugly. Overall the portfolio is down 17.5% but is ahead of its benchmark, which is down 22.8%. So outperformance – yay! But some of these guys need to start pulling their weight – I’m looking at you TORC, but really, how can you fault them for making money and reducing debt? If only they didn’t have to worry about that pesky commodity and a sentiment driven market.


Stock Jan-01 Mar-31 Jun-30 % Change
Tourmaline 36.00 29.65 27.88 -22.6%
TORC Oil and Gas 8.42 6.83 5.07 -39.8%
Total Energy Services 15.18 13.30 13.3 -12.4%
Macro Enterprises 2.11 2.00 1.83 -13.3%
*EQT 65.40 61.10 58.59 -10.4%
*Quanta Services 35.16 37.11 32.92 -6.4%
Average       -17.5%
TSX Capped Energy 222.99 199.74 172.1 -22.8%
*Not currency adjusted


Grade C – out performance, but still losing money


Overall Grade? I can’t give it more than a C, so at least I forecast my poor grades. While it is of course tempting to wipe the slate and start from scratch, I’m gonna stick where I am.


Prices as at July 7, 2017 (June 30, 2017)

  • The price of oil started strong during the week before cratering as a jittery market obsessed over a 100k bpd increase in US production and previously known increases in Libyan and Nigerian output.
    • Storage posted a large decrease
    • Production was up
    • The rig count in the US continues to grow
  • Natural gas took it on the chin for pretty much no reason
  • WTI Crude: $44.31 ($46.33)
  • Nymex Gas: $2.862 ($3.041)
  • US/Canadian Dollar: $0.7772 ($ 0.7723)


  • As at June 30, 2017, US crude oil supplies were at 502.9 million barrels, a decrease of 6.3 million barrels from the previous week and 9.2 million barrels ahead of last year.
    • The number of days oil supply in storage was 29.4, behind last year’s 31.7.
    • Production was up for the week by 88,000 barrels a day at 9.250 million barrels per day. Production last year at the same time was 8.428 million barrels per day. The change in production this week came from a decrease in Alaska deliveries and a spike in Lower 48 production.
    • Imports fell from 8.016 million barrels a day to 7.742, compared to 8.363 million barrels per day last year.
    • Refinery inputs were up slightly during the week but still strong at 17.141 million barrels a day
    • Overall, this was one of the more bullish reports we have seen in the last few months which makes the price movement so confusing.
  • As at June 30, 2017, US natural gas in storage was 2.888 billion cubic feet (Bcf), which is 7% above the 5-year average and about 9% less than last year’s level, following an implied net injection of 72 Bcf during the report week.
    • Overall U.S. natural gas consumption was up 1% during the week – with increases in power offsetting declines in retail, industrial and commercial demand
    • Production for the week was up 1% and imports from Canada were up 3% compared to the week before. Exports to Mexico were down 4%.
  • As of July 4, the Canadian rig count was 150 (25% utilization), 91 Alberta (21%), 20 BC (28%), 35 Saskatchewan (30%), 4 Manitoba (27%)). Utilization for the same period last year was just above 10%.
  • US Onshore Oil rig count at July 7 was at 763, up 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 5 at 189.
    • 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 flat at 21
    • 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%


  • Apache has sold its Canadian assets to a group of buyers, with Paramount Resources buying its Alberta and BC assets for $459 million, an undisclosed buyer buying its Provost assets and Cardinal Energy buying its Saskatchewan and southern Alberta assets. Total proceeds is about $1 billion.
  • Paramount Resources announced at the same time that it was doing a share exchange merger with Calgary-based Trilogy Energy. The combined entity, including the Apache assets is expecting to exit 2017 with 90,000 boe/pd production
  • Trump Watch: Another pretty slow news week. I could get used to this. After golfing on Independence Day. the Don is off to Europe for what is sure to be a superfun G20 meeting. Plus he gets to “finally” meet Vladimir Putin.
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