Crude Observations

Resetting the Scene

So enough with all the patriotism and all that jazz. We’ve spent the past several weeks with lists and itemized reasons why Canada is such an awesome place even though no one wants to invest here. We’ve enumerated the many reasons why Donald Trump is risking global prosperity in his ridiculous attempts to restore balance to only one side of the trade equation. We’ve lamented trade wars, we’ve bragged about Canada’s personality, we’ve raged at the injustice of a lack of pipelines.


We’ve done all that, but do you know the one thing we haven’t done? We have not, to my recollection at least, even attempted to address the most important question on everyone’s mind.


Just what the heck so going on here anyway?


Look I get it. OPEC this, non-OPEC that. Oil prices all over the map, surging one day and giving at all up the next. One could be forgiven for not knowing which way is up.


Which is why, of course, crack Crude Observations research staff are here to give you, dear readers, the rundown, on a general and country by country basis. Call it a big reset, the point being to try to roll it all together into one big, sort of updated energy sector projection.


Setting the scene.


OK, let’s start off by setting the scene. As you may recall, the last time we really looked at this whole global thing, inventories were over-flowing and there was so much oil sloshing around that even the Beverley Hillbillies were feeling the pinch of low prices. Finally the wise men of OPEC stepped up and did what only they can do, namely cut production by a marginal amount to allow consumption to catch up to supply, carve into inventories and restore balance to the oil market.


However, as we all know, there is no such thing as “balance” in an industry that moves in years but has prices that trade in nano-seconds.


So, wouldn’t you know it, as soon that market was in balance, it was out of balance again, this time over to the other side.


How did this happen?


Any of a number of reasons but in this case there were several that came to a head at the same time. The first victim in any commodity downturn is investment in exploration and new production and reduced maintenance expenditure for existing production. The result of this of course was the record low amount of new discoveries being brought on-stream in the 2014-2018 period, the cyclical lows in FIDs and sanctioning of new build and a general lack of attention or deferral approach to existing production.


This lack of investment isn’t something that will be felt in the short term, as there was plenty of production developed in the run-up to the crash and the spare capacity of OPEC and massive inventory overhang was able to cover up the sins of no investment as long as nothing else changed. It is only when other factors come into play that you can see how we have sown the seeds of our own price acceleration.


What factors? Well, it’s like beating a dead horse, but it bears repeating. Fossil fuels are a non-renewable resource. Each individual well’s production declines at its own pace, fields have natural depletion rates and globally the amount of oil declines somewhere in the range of 4% to 6% a year.  So based on existing production/consumption, we need somewhere in the order of 5 million barrels of new production to be brought on stream each year coming from a variety of sources including shale – super high decline, cheap; conventional – low decline, currently less options; offshore – medium decline, expensive; oilsands – super low decline, super expensive and OPEC – no one really knows because they won’t tell us. Currently, only the US is investing any appreciable amount of capital into major new production and with annual declines of 35%, shale probably doesn’t make the most sense to provide the stable output the market needs.


So, a lack of investment and the inevitability of decline rates. Seems like a big deal, but we have all that OPEC spare capacity, especially since they have recently cut production to support prices. Plus the whole OPEC + Vienna Producers Choir thing with Russia playing along. Surely that means there is plenty of slack in the system.


Sure. Usually. Except for a few things. First, all these “cuts” were made from record levels of production pretty much across the board. Remember, before OPEC and the Shangrilas cut production, they had massively expanded it to flood tight oil and oil sands out of the market. So these countries are still operating at close to capacity.


Add in to that the unfolding disaster that is Venezuela, chaos in Libya, a typical Tuesday in Nigeria, a change of control in government in Mexico and we have what? That’s right, unexpected outages. Lots of them. Mix in a little anti-Iran rhetoric from Donald Trump and voila.


Finally, the elephant in the room. Light tight oil. Gonna save the world right? Massive amounts of production, bursting forth from the Texas scrub. A veritable tsunami of oil. Except. Except it can’t get anywhere. Pipelines are full and not being built fast enough. On top of that, no one wants the damn stuff. The market for that type of oil was small to begin with, but then Donald Trump decided to slap tariffs on all the LTO export markets. Oopsie poopsie!


So there you go. We have gone from too much oil and inventories to probably enough oil and less inventories to whoops we overshot that because as usual we forget the human element. All, it seems, in the space of 30 minutes. I mean 6 months. It may as well have been 30 minutes given how flat-footed the analyst community appears to have been.


Anyway, what about the countries that matter. What’s happening with them?


Well, let’s start with the non-OPEC players first.




Russia is a non-OPEC, OPEC +, card carrying member of the Vienna Club. Russia had voluntarily cut back production by some 300,000 bpd, although who knows right? At any rate, Russia craves currency and power. The recent rise in prices isn’t that big a deal for Russia, as they make money for the treasury. More important for Russia is to be seen as a global player. The oil industry is just one tool to make that happen. Russia can increase production back to previous levels fairly quickly but more important to them is developing further resources that require the removal of Western sanctions to get Western money. Fortunately, one Donald J Trump is just the man for the job. Aside from that, the only other interesting thing about Russia is its influence in the Middle East both with traditional US ally Saudi Arabia and Axis of Evil Charter Member, Iran. If you keep in mind that Russia is in it for Russia, they make sense.




As we all know, Canada is the poster child for having all the best assets and no one to share them with. Our wealth of fossil fuels is beyond mind-boggling as is our inability to develop them and then get them anywhere. This too of course is subject to revision in the rapidly changing world of energy. From modest beginnings a mere twelve months ago, Canada is on the verge of having not one, not two, but three major pipeline projects on the go at the same time, increasing export capacity by close to 1.5 mm bpd.  This is not inconsequential as the saying goes. However. However… This capacity won’t be built until 2021 at the earliest so in the meantime, the robber barons of the railway world get to make out like bandits and continue to ship discounted oil to the US and we get to complain about. That said, price signals may take forever to get here because the major plays are so expensive, but get here they will. It is only a matter of time before some serious spend returns to the oilsands. Why do I believe that? Because of the United States.


United States


The United States is the largest producer of fossil fuels in the world, the largest consumer, the largest exporter and, up until recently, the largest importer. It is, in a word, the main market for all things oil. It is also home to the most capital (smart or otherwise) and the current black hole of energy investment – the Permian Basin. With the desire for energy independence so very strong in the United States, the psychological and monetary investment in this one particular play verges on manic. Some say it makes the US a viable alternative to Saudi Arabia for oil production while others question American sanity.


The reality is somewhere in the middle. Light tight oil production is without a doubt a game changer for the United States but not necessarily in the way it views it. While energy independence appears to be a real thing, it fundamentally depends on imports of heavy oil like that produced in Canada, Mexico, Venezuela, Saudi Arabia, Iraq and, yes, Iran. So, the US produces a lot of tight oil and exports it. But it needs a lot of heavy oil and imports it. Then it refines that and exports it. Venezuela and Mexico are in decline. Saudi Arabia is shipping to China, Iraq is a bit of a basket case and Trump just slammed the door on Iran, probably forever. That leaves Canada and our new pipelines. From here in the cheap seats, the US is looking good for energy for as far as the eye can see and Canada looks good to play its part for a similar timeline.


In the short term of course, too many rigs chasing overly expensive land plays, a lack of infrastructure and a product that has a demand ceiling means that the United States isn’t going to solve any impending shortage problems, if anything it could make things worse by crowding out other investment. Hence the pleading phone call from Trump to the Saudis – my gas made with your oil is too expensive and I don’t want to lose a mid-term, can you do me a solid…




China recently surpassed the United States to become the largest absolute importer of oil in the world. Anyone who is surprised by this should of course have their head examined. China is the “largest” in pretty much all fossil fuel categories not dominated by the United States and will soon own those as well. Chinese demand for fossil fuels remains robust, and their production is currently in terminal decline. Interestingly in the Chinese context, they are much more willing to wield their economic might to secure supplies from some of the largest players in the world as opposed to re-investing in declining, mature fields at home. Plus they will take the odd shipment of US LTO. At least up until this week. I think they are mad now. China is a bit of a wild card now, they are a major customer for Iranian oil, but the new sanctions regime is shaking that up. In addition, Saudi Arabia is a major supplier. Lastly, they pretty much own Venezuela. Regardless of where the oil comes from, China is the bellwether for fossil fuels for the next decade at least. At the moment, demand is growing in typical Chinese fashion – 7% a year and with an emerging middle class, who is going to argue with that.


But what about OPEC? Well, in the interests of time, we should only bother with what I call “core” OPEC. In other words, those producers who matter.





Fresh off a couple of years of reasonable stability, Iran found itself on the losing end of the pointed stick carried by Donald Trump as he decided to withdraw from the nuclear treaty and re-impose sanctions, including Iranian oil exports. This was projected to impact as little as 500,000 bpd up to 2 mm bpd of exports. The worst case scenario being no waivers on exports to various non-treaty countries. Recently the Trump administration appears to be walking back its hard-line on waivers, perhaps in acknowledgement that the withdrawal and sanctions were destabilising to prices. Regardless, the damage is done, investment dollars are bolting out the door, Iranian production is likely stalled for the next 10 years, the prospect of conflict in the Middle East is easily up 50% – all very bullish for oil prices, although not so bullish for world peace – I guess everything is a trade-off.


In the meantime, the domestic economy, already a corrupt shambles, continues to lose ground, inciting protests and anti-government sentiment. The future for Iran is cloudy at best.




Iraq is a bit of a conundrum. A serious producer of oil, Iraq should have way more influence than it currently appears to have. Unfortunately it frequently finds itself shunted to the side as Saudi Arabia and Iran tussle for regional supremacy. Operating under the radar screen, Iraq is the OPEC member most likely to cheat on production numbers, which acts as a natural regulator for some of these man-made problems, like the Iran sanctions.


Unfortunately, after years of war, the reconstruction costs for Iraq demand every last bit from the treasury so the oil industry is milked like a 30 year-old cow and treated with as much veneration.


Iraq will continue to produce at levels it is currently at, foreign  investment into the country will be sporadic – at times massive, at times non-existent. It is a steady as she goes producer, don’t expect Iraq to move markets.




Venezuela is a market mover for all the wrong reasons. From a pre-Chavez peak of 3.5 mm bpd of production, the Chavista Bolivarian miracle has managed a spectacular two thirds drop in production, if not more. The country is an impoverished failed state and has lost its once proud seat at the table of OPEC decision makers. In the current market context, Venezuela only matters as a curiosity – like the bearded woman at a circus – a freak of nature, likely to be extinct in the next generation if it was even real to begin with. It will take a miracle and a generation to restore Venezuela to even a shell of its former self.  Bullish for prices though, right? All it took was the complete wrecking of a country with a similar resource base and population as Canada.


Saudi Arabia


So, what hasn’t been said about Saudi Arabia that I can say here.  Nothing of course.


It’s the same old story, but it bears repeating because our collective memory for this truism appears to be about six months. So I will say it again.


When it comes to oil, IT’S ALL ABOUT SAUDI ARABIA. It’s not about OPEC. It’s not about Russia, it’s not about light tight oil or the United States. It’s not about Canada. It’s not about Iran. It’s not about Elon Musk or windmills. It’s about Saudi Arabia. Saudi Arabia has the world’s largest reserves. Saudi Arabia is OPEC and Saudi Arabia is the swing producer. They own the only real spare capacity in the world and thus control the marginal barrel. And they actually are developing their resource base, at their own pace for their own gain. They have to ability and the financial resources to control, manage and manipulate the price of oil for years to come. Donald Trump apparently gets it, hence his phone calls and tweets, I’m not sure why we all continually forget.


It’s all about Saudi Arabia and right now, they are holding the line. They want prices and production where they are. Think about that.



Finally – what does it all mean anyway?


Global energy price Armageddon or a short term spike? I don’t know. You tell me.


Personally, I’m with the latter. We’re in for a good old fashioned ride on oil prices. Enjoy. It’s going to be a heck of a lot better than 2014-2018


Prices as at July 13th, 2018 (July 6, 2018)

  • The price of oil fell during the week as supply concerns eased and trade matters weighed on commodities
    • Storage posted a big decrease
    • Production was flat
    • The rig count in the US was flat
  • Gas lost ground during the week on weather


  • WTI Crude: $71.01 ($74.15)
  • Nymex Gas: $2.752 ($2.925)
  • US/Canadian Dollar: $0.76060 ($ 0.76130)



  • As at July 6, 2018, US crude oil supplies were at 405.2 million barrels, a decrease of 12.7 million barrels from the previous week and 90.2 million barrels below last year.
    • The number of days oil supply in storage was 22.9 behind last year’s 29.0.
    • Production stayed the same for the week at 10.900 million barrels per day. Production last year at the same time was 9.334 million barrels per day. The constant production this week came from constant production in Alaska and the Lower 48.
    • Imports fell from 9.055 million barrels a day to 7.431 compared to 7.610 million barrels per day last year.
    • Exports from the US fell to 2.027 million barrels a day from 2.336 last week and 0.918 a year ago
    • Canadian exports to the US were 3.442 million barrels a day, down from 3.729.
    • Refinery inputs were down during the week at 17.652 million barrels a day
  • As at July 6, 2018, US natural gas in storage was 2.203 billion cubic feet (Bcf), which is 19% lower than the 5-year average and about 25% less than last year’s level, following an implied net injection of 51 Bcf during the report week
    • Overall U.S. natural gas consumption was down 1% during the report week
    • Production for the week was down 0.2%. Imports from Canada were down 5% compared to the week before. Exports to Mexico were up 2% compared to the week before.
    • LNG exports totalled 21.8 Bcf.
  • Slowly but surely… As of July 13 the Canadian rig count was 197. Rig count for the same period last year was actually lower.
  • US Onshore Oil rig count at July 13, 2018 was at 863, constant from the week prior.
    • Peak rig count was October 10, 2014 at 1,609
  • Natural gas rigs drilling in the United States was up 2 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 constant 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 62%/38



  • I’m on holiday and it’s Stampede so I haven’t been paying attention, sorry folks.
  • Trump Watch: NATO meetings (take that Europe you military slackers), got to meet the Queen. 12 Russians indicted in the Mueller probe. Typical sleepy summer.
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