Crude Observations

The Fearless Forecast – Uncurtailed

Are you ready for it? Because I sure am! Brace yourselves dear readers – it is that time of year where I lay myself bare to all of your collective scorn and ridicule and put out the one and only Fearless Forecast that you absolutely must read, right now, before the market opportunity escapes you! Read it!


That’s right, step right up now and let me tell you about the prognostications that will amplify and electrify your portfolios. The stock picks and the macro directions that will set you on the path to eternal riches and immortal salvation.


The dreams, the visions, the words that will allow you to rise above the petty, malignant grind of daily life, secure in the knowledge that up is up, down is down and whatever will be will be.


The future is mine to see and I will show it to you forthwith.


And if I am wrong, que sera,sera right?


It’s not like anyone risks any money on these forecasts. Right? Like really. I hope not anyway…


And if I may say so myself, compared to prior years, this is by far the Greatest Forecast Ever AssembledTM




Broad Themes


Last year a big theme for me was civil unrest, particularly in the Middle East and I find it hard to not roll that one out again this year. It is after all the Middle East and they have a lock on unrest. Uncertainty in Syria, the ongoing conflict in Yemen, Iranian sanctions and the ongoing battle for supremacy between Iran and Saudi Arabia are all flashpoints. Mix in a little “Turkey hates the Kurds”, a dash of Iraq, a pinch of Netanyahu, saute in American indifference and then garnish with a generous sprinkle of Putinesque Russia sauce and you have a witches’ brew that could literally blow at any time.


Further to that, and less recipe oriented, much of this general level of unrest stems from the fact that a lot of these countries are demographically very young but the levers of power are concentrated in mostly dictatorial governments dominated by hard-liners who are often separated from the population not just economically but also by one, two and even three generations – they have very little in common with their general population and it shows up as protest, unrest and violence. This bifurcation creates tremendous stresses on societies and is particularly the case in the Middle East as noted above, as well as Africa and the Indian subcontinent.


The other theme I am following is an unfolding global economic slowdown and the rising recession risk in North America and Europe as well as a trade and debt induced economic shock in China. Recent indicators in the United States are trending downward, but have not yet breached soft landing territory. However, the combination of massive corporate and government debt and persistent deficits, unnecessary and unproductive trade wars and the flashing red warning signals the stock market is giving should give everyone pause. And as bad as the numbers may look out of the US, the European and Chinese indicators are all much, much worse. Recession risk in the United States? 50%. Canada? 33%. Material slowdown in China? 100%.


Are there any solutions to this? You bet. It is time to end the trade war which I believe to be the single most destabilizing economic force affecting the world today. Will it happen? In fits and starts. I have zero confidence in the current instigators of this that they understand what they have started or have the ability to effectively recage what they have released. Buckle up.


Further to this, 2019 is going to be a very rough year for the Donald. No longer presiding over the longest peace-time expansion of the US economy, he is going to have to deal with the consequences of a slowing economy. As alluded to above, much of it of his own making. Plus he no longer controls the House and Nancy Pelosi is the toughest opponent he has ever had outside of a New York crime family. Finally, the Mueller probe is like a sword hanging over his head and it will drop this year. Expect an unpredictable Donald Trump this year and an even more chaotic year.


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 represents just a small portion of the global energy mix in terms of both scale and quality – a consideration that is gaining in importance. 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 too much time and attention being paid to an oversupply is real and we are relatively ill-prepared unless there is some secret OPEC spare capacity that no one knows about.




Is 2019 finally the year that US producers take a breather in the Permian, what with oil prices hovering around $50 to start the year and the cost of capital slowly creeping up? Don’t count on it. With a record amount of DUCs (more than 6,000) quacking around in West Texas and other plays, there is plenty of inventory to complete even if capital for new drilling plateaus or dries up. In addition, the repeatable nature of high intensity drilling will allow the larger companies to execute in the Permian in much more of a manufacturing model, and the majors are much more able to absorb the cash flow vagaries of a resource whose break-evens to this day remain a mystery. Also in the US, a significant amount of capital is once again finding its way into the Gulf of Mexico (BP recently announced the discovery of 1 billion barrels of oil – and no, it isn’t the missing barrels from Deepwater). And unlike light tight oil, GoM oil is actually of a quality that domestic refineries demand.


All of the preceding is a long winded way of saying that we believe that US production will continue to grow and grow significantly. Assuming that year end production numbers of 11.7 million bpd of production in the US are correct, it would not be unreasonable to expect that year end production will be in the range of 12.5 million. With capex budgets being driven by last quarter’s pricing, expect activity to only slowly ramp up so it is reasonable to expect that the first half of the year would see slower growth and that the bulk of supply additions will happen in the latter half of the year.


In Canada, notwithstanding current curtailment policy, we see modest growth in production – on par with last year, probably in the order of 250,000 to 300,000 bpd of oil. This will come from both oilsands and the conventional world. Why? Well Suncor is predicting a 10% increase in production, so that’s close to 100k barrels off the top and unconventional drilling in areas such as the Duvernay and the Bakken continues. Liquids rich condensate is counted in the production numbers and is important in the oilsands transportation ecosystem, being cheaper than US imports, so expect this number to keep growing.


An aside about curtailment. There is no doubt that the idea of curtailment has done its job on the price differential which has narrowed considerably over the past month. The sentiment has certainly changed. However, this genie needs to be put back in the bottle sooner rather than later as the passage of time creates unintended consequences. But let’s be clear – curtailment is an oilsands/heavy oil narrative, not a Montney/Duvernay one. These areas of growth need to be encouraged, not restrained. The job is done, time to get out of the way and let the market finish the job.


OPEC production levels will depend on what happens with the new OPEC/NOPEC agreement at the various jump-off points through the year. The key to the agreement is the Saudi/Russia collaboration which is likely to continue at least until June. If shale growth starts to exceed the top line number referenced above, the Saudis might be inclined to rein in prices but KSA has come out and said they are “comfortable” with $80 oil. It’s a risky game. I would think OPEC/NOPEC output should be flat year over year.


In the rest of the world, it is highly likely that we will see very limited growth this coming year. New projects are being sanctioned but after three years of relative inactivity, a lot of this is maintenance.


The fact that growth is expected to come primarily from US shale should be concerning for a number of reasons, but mainly because it masks the lack of growth and investment in other regions and being such a capital dependent industry, production can turn negative as quickly as it ramps up. Inventories can come down very rapidly and we have seen over the last few years how difficult it is to reverse that trend once it starts. Keep in mind as well that demand growth for oil shows absolutely zero sign of reversing and we now consume more than 100 million barrels of oil per day. We actually need production growth.


Price of oil


This is the one everyone wants to know. It’s the call that all of you are basing your investment decisions on. Well that’s smart, because I’m taking a pretty bold gamble on this one this year.  Why would he do that, you might rightly ask? Well mainly because I got my a** handed to me by Q4 last year and I’m hopping mad. Also, most of the forecasts sit in the mushy middle (ooh $50 to $60, aren’t you the daring forecaster) and where is the fun in that?


So – my thoughts…


On the one hand, you have OECD inventories that have built up but will now start to decline with the new OPEC/NOPEC cuts, we have the political risk premium, the Iran sanction waivers coming off and continued (although slowing) global GDP growth all acting as bullish signals for prices. On top of that, although I’m not sure I would hang my hat on it, my aforementioned expected slowdown in the US is likely to lead to a softening of the US dollar which should push prices up somewhat. On the other hand, you have US shale oil production growth, potential OPEC cheating and of course the end of the oil industry as we know it because of electric vehicles all acting to hold prices back.


I think the bullish case for prices wins, but I wouldn’t be surprised to see oil prices pretty volatile during the year. That said, the general direction is up. My year end price is $80.03 but my average price for the year is going to be $61.47. It’s going to take a lot of work to get to my year-end price level. Besides, Saudi Arabia says they are happy with an $80 handle on oil so who am I to argue with them.


Price of Natural Gas


Ah natural gas, I can’t quit you! As I say every time I write about everyone’s favourite transition fossil fuel, natural gas has been disappointing me and pretty much all of Canada with lousy pricing for what seems like forever. Showing great potential at times before collapsing back to “super-cheap alternate fuel – why don’t we use even more of it” status. And like any true forecaster for natural gas, we watch the storage reports with bated breath and hope for a polar vortex to descend on New England, spiking prices and proving our bullish forecasts right for yet another fleeting week before crashing back to earth with a heat wave in the Midwest.


That said, gas consumption in the US is way up. Exports of LNG are growing rapidly and exports to Mexico are also rising. Of course production is also rising. But this isn’t limitless so at some point supply will have to become constrained – even though there is always old reliable Alberta supply to act as a relief valve. The catalyst for gas is still a year or so out – LNG Canada, more export capacity out of the US, the completion of the coal to gas power conversion – this all takes additional time. I won’t give up on the bullish case, but it’s a multi-year play.


My year end price for natural gas is going to be $3.90 and the average price will be $3.26, up marginally from last year. Fingers crossed.


Activity Levels


On the Canadian side, this year is going to be a hard one to predict.


Doom and gloom seems to be the prevailing sentiment in the face of record differentials in Q4 last year for WCS and the subsequent oil price swoon and free gas and all that. Add on top of that curtailment and it is easy to see the case for Canada basically shutting its doors for all of 2019.


But that would be wrong. And silly. As I have said to clients, there was sure a lot of noise and gnashing of teeth about capex budgets, especially in December when the rig count plummeted to 70. But… But prices now appear to have stabilized, the differential has narrowed and the curtailment is clearly an oilsands thing and has a much lesser impact on the unconventional side of the equation. Plus Canadians are creatures of habit and it’s winter. And in winter we drill. Evidence? After all the news articles about the end of drilling in Canada the rig count snapped back, not to last year’s levels, but good enough to offset some of the gloom, if not the doom.


With all that in mind and taking into account the OPEC/NOPEC production cut, plus no accountability whatsoever, I will confidently predict that activity in Western Canada will be … pretty much flat with last year. I expect E&P companies to hold their cards close to the vest while awaiting price stability. Capex spend in the first half of 2019 is going to be soft, but activity will pick up in the latter stages of the year on price and impending completion of Line 3. So less activity in H1 is going to trade off high relative activity in H2.


As with last year, The majority of the activity is expected to be concentrated in the Montney/Duvernay/Viking fairway with the balance in Saskatchewan. The emerging East Duvernay tight oil play which I will for fun call the “CanPermian” to see if it sticks will see continued investment this year but is still years away from exploitation.


Curtailment aside, oilsands activity is expected to be focused on production maintenance and modest brownfield development until Line 3 comes online. Another relatively thin year for Canada’s signature oil play.


Compared to how monumentally craptacular 2015 and 2016 were for the Canadian oil patch, these numbers are OK, but it’s hard not to feel a little tinge of disappointment that our baby recovery or early 2018 got kicked in the teeth. I put the blame for that on low gas prices, a perceived to be hostile regulatory regime in Canada affecting capital, ridiculous oil pricing, political rhetoric scaring investors and a lack of signature infrastructure projects to boost enthusiasm and hype.


Unlike Canada, the US had significant growth last year in both rig count and production. That said, the rig count has been relatively flat for a number of months. While the Permian land rush continues, the large inventory of DUCs will hold back the rig count and drilling activity somewhat in the first half. Keep in mind that the Permian has similar offtake issues as Canada, although with a higher will to solve them.


That said, as long as the cash is coming from Wall Street and the banks, the incentive to drill will always be there, regardless of price or profit.


M&A Activity


M&A in the oil patch, at least the upstream side and in the United States, was at its highest level since 2014. This trend is expected to continue into 2019 as property consolidation, non-core asset sales and private equity investment all remain robust notwithstanding the commodity price drop in Q4. Expect the M&A activity to be broadly based – upstream, downstream, oil, gas, services and everything in between.


On the Canadian side, now that the differential has recovered (perhaps too much but that’s a matter for another day), M&A activity in Canada should pick up as smaller players consolidate to achieve scale and the intermediates look to gain market share and pursue specific regional strategies. Construction progress on LNG Canada should lead to M&A activity amongst the gas-weighted companies as they seek to fill the gas supply not already developed by the project proponents. With LNG and positive off-take news, expect to see some American or foreign interest come back into Canada – crazy I know, but I did say it was a “fearless” forecast.


On the services side, we still like energy infrastructure and related industries and see that as an area where Canada will see a fair amount of activity.  Mid and downstream oriented companies will continue to be of interest to strategic consolidators and private equity. On the upstream side, ancillary service providers such as safety and testing companies will attract interest in addition to traditional drill-bit focussed companies, particularly as we get more clarity into H2. Worthy of note are three transactions announced in the first week of January which were all inbound US private equity backed strategics either getting a toehold in Canada or expanding their presence. Canada is a currency advantaged, rational valuation and stable market for consolidators tired of the madness in Texas.


Canadian Dollar


The Canadian dollar should see some relative stability this year with the commodity price, but there is no real catalyst to send it upwards aside from timing differentials with the United States in the economic cycle. From a year end value of about $0.75 against the US dollar, I fully expect the Canadian dollar to reach perhaps as high as $0.78. How daring is that for a forecast?




Finally, right? I know on the surface things look bleak, but it may surprise people outside of the energy sector that we are on the cusp of an infrastructure supercycle in Canada. This should continue well into the 2020s. Out on a limb and don’t fit me for a straight jacket, but I fully expect to see the following in 2019:


  • Line 3 complete and operational by year end
  • TransMountain Expansion underway in the summer
  • Keystone XL back in play later this year
  • Coastal Gas Link fully underway this summer


And we may get one more LNG FID this year. So there.


How about them apples?


Stock Picks


So last year was a bit of a disaster, right? So this year has to bet better. Or I’ll just stop and then no one can make fun of me.


True to my rules, this year I pick two Canadian E&P’s as well as two service companies and, finally, one American producer and one American service company.


Here goes nothing…


On the Canadian oil and gas E&P side, I am going to bail out and pick an old shoe and a contrarian pick. Both of these companies should benefit from imprioved offtake and one in particular is so undervalued it could arguably be considered free – kinda like AECO gas.


Pick #1 is Suncor. Easy right? The beast of the patch, but a core holding if you want to play Canada. Suncor has already stated it will grow production this year by 10%, so eat that curtailment fans. I like the attitude.


Pick #2 is Crescent Point. I know, I know. But really, this one is the down-trodden once golden child trying to reinvent itself. And it trades at less than 0.3 times book value. That’s absurd.


On the large cap Canadian service side, I am going to pick CES Energy Solutions. CES provides chemical solutions and services through the lifecycle of the oilfield ranging from upstream through piplines and downstream. They have good continental exposure and are not too leveraged to the drill bit.


Rather than do the big bailout and pick another pipeline operator this year, I am still staying away from the drill-bit (as much as possible) and, assuming the whole curtailment thing is going to create opportunity for well servicing companies (the guys who keep things going when the sexy big rigs leave), I am going with CWC Energy Services. Mainly because I wanted a service company and I know the CEO and he’s a pretty smart guy.


In my search for a US producer, I decided to leave the Permian Basin behind and go to new frontiers. No, not North Dakota or Wyoming. Nope, I’m going away from the herd and into the water. Talos Energy is a pure-play Gulf of Mexico producer with current production of 55,000 boe. Wish me luck!


On the service side, I am ditching the drillbit and going almost green. This year I am picking a company that does a lot of consulting and engineering in the areas of water, environment and infrastructure. It’s called Tetra-Tech. It used to be very active in the fossil fuel space but has had a corporate conversion.


That’s it! Fearless? Sure. Crazy? No doubt. Food for thought? I hope so.


A few final predictions in the quick fire round…


Wall – Never!


Indictment – Don’t be silly


Impeachment – Not a chance


Super Bowl – New Orleans.


Stanley Cup – Winnipeg




Alberta: This will be a UCP win. If TransMountain isn’t back on it will be a wipe-out but if it is, it’ll be closer but still a majority. Rachel Notley wins her seat but could conceivably leave provincial politics for greener (orangier?) pastures…


Canada: This one is trickier and I think depends on the Burnaby-South by-election. If Jagmeet Singh, the NDP leader loses that, I think he is out as leader, to be replaced with a stronger option (Charlie Angus or … dare I say it, Rachel Notley?)  which sets up a dream (nightmare) vote-splitting scenario between the Liberals and the NDP. This vote splitting is essential to give the Conservatives the chance they need to encircle the right flank. If that doesn’t happen, I think Trudeau wins a second term relatively easily with a reduced and chastened majority.


That’s all I have. Too long I know, but I refuse to curtail myself.


Prices as at January 11, 2019 


  • WTI Crude: $51.72
  • Nymex Gas: $3.159
  • US/Canadian Dollar: $75.34



  • As at January 9, 2019, US crude oil supplies were at 439.7 million barrels, a decrease 0f 1.7 million barrels from the previous week and 20.2 million barrels above last year.
    • The number of days oil supply in storage is 25.1 compared to 24.2 last year at this time.
    • Production grew slightly for the week at 11.675 million barrels per day (25 thousand -barrel per day increase). Production last year at the same time was 9.704 million barrels per day.
    • Imports grew from 7.466 million barrels to 7.579 million barrels per day compared to 7.863 million barrels per day last year.
    • Exports from the US shrunk from 2.237 million barrels per day to 2.065 million barrels per day last week and grew from 1.015 million barrels per day a year ago
    • Canadian exports to the US were 3.760 million barrels a day, up from 3.253
    • Refinery inputs rose during the during the week to 17.521 million barrels per day
  • As at January 9, 2019, US natural gas in storage was 2.614 billion cubic feet (Bcf), which is about 464 Bcf lower than the 5-year average and about 204 Bcf less than last year’s level, following an implied net withdrawal of 91 Bcf during the report week
    • Overall U.S. natural gas consumption fell 3% during the report week
    • Production for the week was flat. Imports from Canada increased 18% from the week before. Exports to Mexico increased 19%
    • LNG exports totaled 36.2 Bcf
  • As of January 11, 2019, the COADC Canadian rig count was 184 (AB – 122; BC – 17; SK – 40; MB – 2; Other – 3. Rig count for the same period last year was 276.
  • US Onshore Oil rig count at January 11, 2019 is at 1052, 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 up 4 to 202.
    • 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 dropped 2 to 23
    • 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 56%/44%

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