Crude Observations

The Inside View

By now everyone involved in the oil and gas industry will have heard about the outcome of the bi-annual special gathering of OPEC ministers and the NOPEC crew (otherwise known as Russia). will they, won’t they, how long, who will be the first to cheat – these are all interesting questions that will have interesting answers and in fact some have already been dealt with and the opinion makers for all the major publications have had their say already and they are all far, far wiser than I so I wouldn’t dare to cast up a contrary view. So I won’t.


But… and there’s always a but…


I can do one better. I can offer something so compelling that it may just set the oil world on its head! That’s right, if you haven’t already guessed, I am offering a one-time glimpse into the star chamber. An opportunity to learn from and dissect the decision making process that informs and underpins the opaque and economy-moving communiques that emanate from this most august assemblage of … of… despots, dictators and dilettantes?


How, you may ask, can I do this? Let me tell you.


You see, at great risk to yours truly and a number of key operatives I was able to get my hands on an actual audio recording of the closed door OPEC meetings which I have transcribed for your reading pleasure below. First a word of warning – my Arabic (and Russian) is rusty so I might have missed a few key points here and there and it was hard to hear anything over what seemed to be a food fight at lunch. But we are getting ahead of ourselves – best to start at the beginning. Where possible, I have added interpretive notes to make it easier to follow.


<<Sounds of shuffling chairs, muttering, quiet laughter.>>


Call to order by the Secretary General.


<<throat clearing>>


Venezuela – I wonder perchance if I might have a word of introduction, as you know we have had a minor management shuffle at our oil company PDVSA…


Saudi Arabia – Not this again, no one cares. Are you still even in OPEC?


Venezuela – Respectfully, we are a founding member of OPEC and a proud and wealthy South American Bolivarian Democracy!


Saudi Arabia – Spare us your drama. What’s your production now? 1.5 million barrels? Smaller than Canada! Now you are owned equally by Russia and the Chinese and your “democracy” is even more of a farce than ours.


Russia – Russia denies any involvement in Venezuela.


<<Gavel thumping several times>>


Sec Gen (OPEC) – Call to order gentlemen. It is now five minutes past the scheduled start time and every minute delay keeps us from our food. The matter at hand – our cooperation agreement, is it working, should we extend it and for how long. Everyone in the room will get 1 minute to bore us and then we will open up the floor to discussion. The Saudi Arabia will tell us what we are doing.  Venezuela, you may go first.


Vz – Well your eminence…


OPEC – Your minute is up. Kuwait, you are next.


Vz – Wait a minute, I was talking. Our view is import…


<<sound of scrambling, a chair tips over, there’s a yelp and then a noise that sounds like tape unwinding – really it’s not very clear what is happening here but after a minute it all settles down>>


Russia – Venezuela will be no longer a bother.


Kuwait – Wait, why is Russia in the room? Aren’t they supposed to be coming later? They aren’t part of OPEC.


Russia – Russia is not in the room.


Saudi Arabia – Russia is not in the room


Kuwait – Wait, what? Oh never mind. Kuwait will do what Saudi Arabia tells us to do.


Saudi Arabia – Everyone will do what Saudi Arabia tells you to do.


<<This statement was followed by a number ayes and yesses in agreement>>


Russia – Except Russia. Even though we are not actually in the room.


Iran – The great nation of Iran wishes to advise that while we are concerned about recent aggressive actions by Saudi Arabia in the Middle East, we will support the cuts, mainly because we need the cash from higher prices to buy and build more arms to defend ourselves against upcoming Saudi aggression. Does this strike anyone as odd?


Saudi Arabia – Seems fairly sensible to me.


Iran<<clearly annoyed>> Anyway, our production growth has stalled and the threat of further sanctions by the United States has put a chill on all this theoretical inbound investment. And Russia is a no show “ally” (I see you over there). So for us it’s less a cut and more just “what’s happening”.


Iraq – we agree to nine more months, although truth be told, we don’t intend to honour the cuts and will cheat as much and as often as possible.


Algeria – And this is different how?


Saudi Arabia – Very well then, we are agreed. The cooperation agreement will be extended for another three months. Wait, I meant six, or was it nine? Does it really matter? We will all just do what we want anyway, right?


<<Loud laughter>>


Saudi Arabia – Calm, my friends, it will soon be time to call in the non-OPEC members of the cooperation agreement to tell them what they have to do, I mean, solicit their valued feedback. Russia, I assume you have these parties well in hand – I have heard Mexico is a bit tricky these days what with walls and the end of NAFTA. Oh, and please leave by this secret door behind the bookshelf and come back in with the group.


Russia – All will be delivered as already agreed. Russia was never here.


<<sound of door opening and closing>>


Sec Gen – We still haven’t heard from everyone. Libya and Nigeria were on the agenda as well.


UAE – Perhaps we should order food and spend some time eating so that the assembled media outside can get all agitated by how long this is taking and get all wound up in crazy conjecture and send the price of oil bouncing up and down. As you all know, my son is a big day trader in commodities and he could use some good intra-day volatility.


<<It wouldn’t be an OPEC meeting if they didn’t try and game the market a bit for fun. I have heard that in some previous meetings all they did was play monopoly and smoke cigars while the market went haywire>>


Sec Gen – Done. Servants, bring us lunch!


<<sound of door opening and closing>>


Russia – Did someone say lunch? I’m starving.


<<At this point the meeting devolved into a lot of small talk as lunch was brought in. There was a fair amount of rattling of plates and cutlery – this could have been a food fight, although no one declared one, so… After the lunch break, it sounded like a number of the delegates played a few hands of poker before all were called back to order>>


Sec Gen – OK, a few matters to discuss before we rubberstamp, I mean vote on, Saudi Arabia’s plan for OPEC. First up, Nigeria and Libya.


Saudi Arabia – The free ride is over for both of you. It is time to show your solidarity with the cooperation council. I, I mean we, will announce you have agreed to cap your combined production at 2.8 mm barrels per day.


Libya – Umm, OK. Isn’t that what it is now?


Saudi Arabia – Yes. Clearly you are new at this, Qadafi was more practiced. At OPEC, we only promise what we know we can deliver and usually what the market has already priced in. I mean, we are all in it for the money. It’s not like we really care what happens to anyone else. By announcing that you are capping at this rate, the market will focus on your cheating instead of your maximized output and inability to pump more.


Nigeria – I love OPEC.


Russia – I have question on US shale. Is shale threat?


Saudi Arabia – No.


Russia – Elaborate please.


Saudi Arabia – US tight oil or shale is an important contributor to global supply and the threat of massive expansion of shale acts as an artificial buffer to keep prices in check. But let’s face it, at $7 to $10 million per well and average production of 1000 barrels per day per well, the Americans will need to complete 1000 wells and spend up to $10 billion just to add 1 million barrels per day of production. I can add this by placing a phone call and turning an actual gold tap in my bathroom. We are not threatened by the Americans and neither should you be. And their decline rates are massive – it’s like a treadmill set on sprint. In all reality we can’t control them anyway so best to let them spend themselves into oblivion – their dependency on OPEC will come back. You must be patient.


Russia – Interesting. What about Canada?


<<at this point the background noise and muttering in the room stopped completely. It stayed completely silent for about 10 seconds until someone slowly started chuckling and was soon joined by others until it sounded like the entire room was rolling around on the floor laughing like schoolkids. Eventually, this died down and the room regained its composure.>>


Saudi Arabia – Phew, I needed that. We take ourselves far too seriously here at OPEC. Canada! (more laughter at this point) Oh Canada… (muffled chuckles)


Russia – Much as I thought. I will leave now. I was never here. Don’t forget about Venezuela tied up in the corner.


<<sound of door opening and closing>>


Sec Gen – OK. Now for the communique?


Saudi Arabia – Very well. Here is what we will say. 9 month extension to end of 2018, Libya/Nigeria cap on output. Option to review in June right?


Iran – Wait, doesn’t that mean it’s a 3 month extension?


Saudi Arabia – Egads Iran! No, it’s a 9 month extension. The review is all about making sure what we want to accomplish is proceeding.


Iran – This is all about your stupid IPO isn’t it?


Saudi Arabia – Clearly.


Sec Gen – So, we are all agreed then. Can we turn the light on and let them know we’re done? It’s been more than 3 hours and we still have the NOPEC people to let in.


All – Yes, we agree.


<<Apparently at this point the delegates took a break as there was very little sound except for a distant whimpering, which I can only imagine was the Venezuelan delegate who was apparently tied up in the corner. After about an hour of this the secret door opened again>>


Russia – OK, I take gag off you for one minute.


VZ – Thank you. They wouldn’t even let me vote! The great Socialist Paradise of Venezuela will not stand for this humiliation!


Russia – Button it comrade. If you want continued Russian financial support, tell your bosses they need to give us more oil assets as collateral. If we don’t own the country in a few years, Mr. Putin will be quite upset. And keep those Chinese out.


VZ – Mmmph <<I imagine he had been regagged at this point>>


<<The Russian left the room again at this point and shortly thereafter the group of delegates shuffled back in.>>


Sec Gen – Alright, call in the NOPECers!


<<noises of a few more individuals coming in>>


Saudi Arabia – wonderful to see all of you here, particularly you, Russia, it is always a pleasure to have your company.


Russia – Russia agrees.


Saudi Arabia – that very nice of you.


Russia – No. Russia agrees to extension for nine months, review in June.


Kazakhstan – Wait, don’t we get a chance to speak on this, my government…


Russia – No. Russia agrees. No one else may speak.


Iraq – Well, this is awkward.


Saudi Arabia – Excellent, everyone is agreed. Let’s go tell the media what they already know. Does anyone have dinner plans? I’m starving.


<<Lots of handshaking and backslapping followed by footsteps shuffling out of the room>>


Saudi Arabia – So? That went as well as could be expected.


Russia – Yes, indeed. Russia is pleased. It is complicated playing our ally Iran like a fiddle to get what we need in the oil market, but it will be worth it in the long run. Letting the Americans spend all their money in tight oil while you wait them out by making all of OPEC hold up production is an excellent strategy. What price level are you really looking for in this IPO anyway?


Saudi Arabia – Ideally $70, but we would settle for something in the $60-$70 range. We have made so much investment in downstream processing capability that the market is going to love us no matter what.


Russia – Excellent. Speaking of IPO, you remember the personal allotment that you have set aside for my boss, correct?


Saudi Arabia – How could I forget – a matching allotment to whatever Mr. Trump and his kids get… Hey – what should we do about Venezuela?


Russia – Up to you.


Saudi Arabia – Alright, perhaps I will ship him to China … Canada! Seriously, you had to bring up Canada?


<<Sound of two men laughing. Door opening and closing>>


<<At this point the recording ends, so the fate of the Venezuelan delegate was very much up in the air. Presumably someone cared enough to untie him at some point>>


So what did we learn from this recording?


Lots actually.


First off, Saudi Arabia was, is and always will be the boss of OPEC. Second, all OPEC decisions are based on self-interest. Third, even regional foes like Iran and Saudi Arabia will put aside their differences for the mutual padding of bank accounts. Fourth, the IPO of Aramco will happen sometime after the June meeting and maximizing that value is the Saudi mission. Fifth, the cooperation between Saudi Arabia and Russia is real. Finally, Venezuela may be a joke, but only Canada can make OPEC laugh.


Prices as at December 1, 2017 (November 24, 2017)

  • The price of oil fell during the week on OPEC meeting uncertainty and pipeline restart, but rallied late!
    • Storage posted a decrease
    • Production was up marginally
    • The rig count in the US was up
  • Natural gas rallied then slumped then rallied during the week – primarily on weather – c’mon gas, I wrote about you!


  • WTI Crude: $58.45 ($58.92)
  • Nymex Gas: $3.079 ($2.827)
  • US/Canadian Dollar: $0.7882 ($ 0.7867)


  • As at November 24, 2017, US crude oil supplies were at 453.7 million barrels, a decrease of 3.4 million barrels from the previous week and 34.4 million barrels below last year.
    • The number of days oil supply in storage was 27.2 behind last year’s 30.2.
    • Production was up for the week by 24,000 barrels a day at 9.682 million barrels per day. Production last year at the same time was 8.699 million barrels per day. The change in production this week came from an increase in Alaska deliveries and a rise in Lower 48 production.
    • Imports fell from 7.873 million barrels a day to 7.329 compared to 7.548 million barrels per day last year.
    • Exports from the US rose to 1.412 million barrels a day from 1.591 and 0.474 a year ago
    • Canadian exports to the US were 2.917 million barrels a day, down from 3.300
    • Refinery inputs were up during the week at 17.003 million barrels a day
  • As at November 24, 2017, US natural gas in storage was 3.693 billion cubic feet (Bcf), which is 3% lower than the 5-year average and about 8% less than last year’s level, following an implied net withdrawal of 33 Bcf during the report week.
    • Overall U.S. natural gas consumption was down 6% during the week, influenced by decreases in residential demand driven by warmer than normal temperatures
    • Production for the week was up 1%. Imports from Canada were down 1% compared to the week before. Exports to Mexico were down 1%.
    • LNG exports totalled 14.9 Bcf.
  • As of November 27 the Canadian rig count was 192 – 139 Alberta, 23 BC, 27 Saskatchewan, 3 Manitoba. Rig count for the same period last year was about 165.
  • US Onshore Oil rig count at December 1 was at 749, 2 up from the week prior.
    • Peak rig count was October 10, 2014 at 1,609
  • Natural gas rigs drilling in the United States was up 4 at 180.
    • 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 down 2 at 20
    • 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%


  • Enbridge announced an offering of $1.5 billion common shares via private sale to three institutional investors.
  • Enbridge announced it had reached an understanding with the government of Michigan regarding replacement options of its aging Line 5 pipeline that crosses the Straits of Makinac between Lake Huron and Lake Michigan
  • Houston-based Civeo Corp. says it is buying Noralta Lodge Ltd. of Edmonton for $367 million in a deal that unites two major providers of workforce accommodation in the oilsands region of northern Alberta
  • First oil for the massive Hebron offshore oil project in Newfoundland operated by ExxonMobil Canada. At peak, the project will produce 150,000 bpd.
  • A Liquid Propane Gas export facility to be built on the BC coast by Pembina Pipeline received a positive final investment decision
  • The Federal Government stepped into the TransMountain pipeline brouhaha, basically telling the NEB to get it done
  • The BC Government announced it was convening a panel to review fracking
  • Trump Watch: Trump retweeted some right-leaning, Islam-bashing fake news, his tax plan is coming closer to being passed without debate and, at last count, he stands to make several billion of some of its provisions. Oh yeah, and Michael Flynn pled guilty to lying to the FBI and has apparently agreed to testify about contacting Russia for the Trump campaign.
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