Crude Observations

Oil’s Back Baby!!!

Yup, you heard it here first (or second, maybe even third), this is the week that it all happened, the week that we can finally call the oil price crisis officially over.


Okay, maybe not completely over, or even close to almost over, but is sure was nice for a while to taste the sweet nectar of oil prices over $50, no matter how fleeting that might be.


So what happened? Well, a few things.




Global storage and inventory finally seems to have turned the corner. Although as mentioned before the data is hopelessly lagged, completely untransparent and unreliable at the best of times, the anecdotal evidence is piling up. From completely unsubstantiated stories of critical supply hubs in Africa being drained of oil to another article exposing China as an oil hoarder, the trend is unmistakable – inventories are coming down. Now, if only we could have some proof…




Aside from Libya and Nigeria, the OPEC/NOPEC production restraint alliance has held up surprisingly well. With compliance high and the market seemingly turning the corner, it was interesting to hear the speculation that extending the cuts further into 2018 from the current March end date was on the table. While not explicitly discussed at this Friday’s meeting to assess the effect of the production-cap agreement and progress toward a balance between supply and demand, it will surely be on the agenda for the November semi-annual fooferah and bait and switch session.


Rhetoric and Global Instability


The world is a funny place. Just when you think we have reached some measure of peace and stability, someone throws a wrench into things. Now, aside from the usual nonsense in the Middle East, we have specific hot spots which should see the risk premium in the price of oil rise over the next few months. These include:


  • The ongoing conflict in Yemen, which is increasingly expensive and distracting for Saudi Arabia and threatens to drag in the United States
  • The Monday referendum on Kurdish independence in Iraq and what it means for oil production in the important Kirkuk region. Right now, it’s up in the air.
  • The on-again, off-again sabre rattling by the Americans towards Iran and threats to cancel the nuclear agreement and reinstate sanctions
  • The very frightening escalation of tensions on the Korean Peninsula between North Korea and pretty much the rest of the world but particularly South Korea, Japan and the United States. While presumably cooler heads on either side should and will prevail, the war of words between “Rocket Man” and “the Dotard” risks allowing events to spiral out of control.
  • And who can forget the ongoing covfefe crisis in Nambia.


US field activity, draw-downs of fuel supplies with the refinery shutdowns in the United States.


As noted previously, the rig count seems to have plateaued in the U.S., held back by range-bound oil prices, rising field costs and skittish capital markets. This makes the predicted tsunami of tight oil less likely to overwhelm the market (at least until oil hits $55 to $60, then watch out!). That said, the oil and gas sector has a tendency to over-invest at absolutely the worst time so keep an eye out.


Another significant influential factor is the knock-on effects of the shutdown of refineries due to Hurricane Harvey and the after effects of both Harvey and Irma. In a nutshell, huge draw-downs in fuel and distillates (think cars, diesel for heavy machinery) are not being supported fully by refinery runs which will serve to draw down the excess inventory and are quite bullish for prices.


The impact of lower investment


The IEA published a chart showing the upstream oi and gas investment was down 44% in 2016 from 2014. While a modest uptick is expected in 2017 (mostly US tight oil and Canada), the spillover effect of this drawback in investment is in most analyst’s views likely to be tight supply starting perhaps as early as late 2018, especially if the OPEC cuts hold and the US has really plateaued.


But the big catalyst?


Let’s face it, most of the above are supply side and are all at the margin. The biggest factor in any strength of prices or longer term reduction in inventory has to be demand driven. Well I guess it’s fair to say that the consumer has finally delivered on cue. According to the IEA, demand growth is a robust 1.6 million barrels a day so far this year, far ahead of earlier forecasts and supporting some of the highest levels of global GDP growth in recent memory, proving yet again that the world craves nothing more than sweet, cheap oil. Can we go to $60 and not knock the recovery on its ass? I believe so.


The Jeff Rubin Effect


OK, not a big factor, but I read an article this week that reminded me of it. Canada’s very own wavy haired and silver-tongued prognosticator of all things extreme has emerged from hiding and pronounced that new pipelines are unnecessary because oil is dead and oilsands are uneconomic, too expensive and that we should all move on with our lives. This is the same Mr. Rubin who predicted $200 oil back in 2006 right before oil plunged from $147 to $40 a barrel and subsequently predicted the demise of the industry right before the last run-up in prices. Always the contrarian, always provocative and entertaining but often negatively correlated with the market – the Jeff Rubin effect is a real thing. If he’s telling me to sell, I’m thinking it may be time to buy.


So are the good times here to stay?


Short answer? At least until Monday – when the markets open.


Good times is such a relative term right? In 2014 $50 oil was the nightmare scenario. Here at the end of the third quarter of 2017, a full three years after prices started to crater, it’s time to break out the bubbly. Realistically, I don’t think we are out of the woods by any stretch and we are certainly not in good times quite yet. Where we are is better times. Better than last week. Better than a few weeks ago. Absolutely better than February 2016 that’s for sure. I don’t think there is any sense in getting too carried away on the back of a one-week rally that puts us barely over $50 a barrel, but it sure feels better this week than last.


Am I changing my forecast yet again? Nope. $56 is where I revised myself to. Seems a pretty good call at this point.


Now excuse me while I do my civic duty, fill my gas tank and spend the weekend driving. I do love me that cheap petrol!


Prices as at September 22, 2017 (September 15, 2017)

  • The price of oil continued to rise during the week as refineries came back online post Harvey and demand numbers were robust
    • Storage posted a large increase
    • Production continued to recover
    • The rig count in the US appears to have plateaued
  • Natural gas fell during the week on a supply build.


  • WTI Crude: $50.65 ($49.83)
  • Nymex Gas: $2.949 ($3.035)
  • US/Canadian Dollar: $0.8112 ($ 0.8198)


  • As at September 15, 2017, US crude oil supplies were at 472.8 million barrels, a increase of 4.6 million barrels from the previous week and 1.2 million barrels below last year.
    • The number of days oil supply in storage was 30.8 behind last year’s 30.2.
    • Production was up for the week by 157,000 barrels a day at 9.510 million barrels per day. Production last year at the same time was 8.512 million barrels per day. The change in production this week came from an increase in Alaska deliveries and recovering Lower 48 production.
    • Imports rose from 6.480 million barrels a day to 7.368 compared to 8.309 million barrels per day last year.
    • Refinery inputs were up during the week at 15.172 million barrels a day
  • As at September 15, 2017, US natural gas in storage was 3.408 billion cubic feet (Bcf), which is 2% above the 5-year average and about 4% less than last year’s level, following an implied net injection of 97 Bcf during the report week.
    • Overall U.S. natural gas consumption was up 11% during the week as Florida demand recovered from Irma on Irma and cooler weather
    • Production for the week was up 1%. Imports from Canada were up 9% compared to the week before. Exports to Mexico were down 2%.
    • LNG exports totalled 17.0 Bcf.
  • As of September 19 the Canadian rig count was 193 (30% utilization), 129 Alberta (30%), 24 BC (34%), 35 Saskatchewan (30%), 5 Manitoba (33%)). Utilization for the same period last year was just above 15%.
  • US Onshore Oil rig count at September 22 was at 744, 5 less than week prior.
    • Peak rig count was October 10, 2014 at 1,609
  • Natural gas rigs drilling in the United States was up 4 at 190.
    • 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%


  • Veresen Inc. announced that it had filed applications with the United States Federal Energy Regulatory Commission (“FERC”) for the construction and operation of a 7.8 million tonne per annum LNG export terminal in Coos Bay, Oregon
  • Suncor reported that 123 birds have died at the Fort Hills oilsands project north of Fort McMurray. In related news, an estimated 40,833 bat deaths, 14,144 bird deaths and462 raptor deaths were attributed to wind turbines in Ontario alone. I will leave it to you to guess which is being investigated by an actual regulatory body. Yup, you would be correct. Global estimates are that tens of millions of birds are killed annually, but… green stuff
  • Trump Watch: The Donald addressed the United Nations General Assembly. It is fair to say that he woke a few people up. I’m a bit bummed that he didn’t call ISIS losers like the media promised – I guess I will have to satisfied with strange Elton John allusions.
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