Crude Observations

The worst time of the year. Forecast Review

Note from me – WordPress changed the way it does its posts so I haven’t been able to figure paragraph spacing yet. Many apologies.

Just think, 2018 only ended a mere 4 days ago and it is so forgettable that I have forgotten all about it. Except when I am reminded of it. Like now. When I am forced to look back at what happened last year and compare that to what I expected to happen.

Put another way, ever wonder what happens when a prognosticator celebrates their own brilliance a mere ¾ of the way to the end of a forecast period only to be dealt a particularly harsh lesson in the vagaries of the market?

Ever wonder what shambling wreck of a forecaster looks like when they prove unable to account for inexplicably cratering oil prices, a double-dog dare you train wreck of a trade war and just general uneasiness that those in power may not actually have the slightest clue as to what they are doing?

Well here you go. That guy is me. The guy sobbing in the corner. That’s me. The guy who showed up at a New Year’s Party in costume because he didn’t read the invite? That’s me. The guy who goes to a football game in December in shorts and a T-shirt because he didn’t check the weather? That’s me.

On the other hand, because I don’t believe in fixing my forecast on the fly, I expect to see things I miss on be quite ludicrously out of whack. What I wasn’t prepared for (and it appears many others are in the same boat) was the complete unravelling that occurred in pretty short order, starting in October and ending, quite definitely, on December 31.

So, what happened? It all seemed so promising.

Before I dive in, I offer you the following quote from my Q3 review:

“In all seriousness, how much worse can it get in the next three months? I’m going to live to regret saying that aren’t I?”

Broad Themes

One of the bigger themes I had on my radar at the end of last year was civil unrest, in particular in the Middle East and Saudi Arabia but also more broadly across the region.

So far Syria seems to playing along as are the Palestinian territories, but Iran and Saudi Arabia for a while seemed like they were keeping things in check, notwithstanding the various proxy confrontations and the escalation of the Yemen conflict. However, all bets came off when Trump announced he was withdrawing from the nuclear agreement with Iran and put in place stiff new sanctions on Iran. The effect of this is to destabilize the entire region. While it remains to be seen how stiffly sanctions will be enforced, there is little doubt whose “side” the US has chosen in the ongoing struggle for domination in the Middle East.

While the squeeze on Iranian oil exports wasn’t as immediately tight as originally expected, it is expected that economic conditions will deteriorate further, raising the risk that Iran could be the next domino to fall in the Middle East. At the same time, recent elections in Iraq have led to some measure of stability there. Donald Trump’s rash decision to withdraw from Syria is seen by many as a chance for both Russian and Iran, as well as Syria, to re-align the balance of power in the highly volatile region and is seen as particularly isolating to Israel, now confronted by forces universally hostile.

Meanwhile the oil keeps pumping. Except in Libya. Where one week it is at record highs and the next it’s halved.

Meanwhile an emboldened Saudi Arabia continues to act with impunity, pursuing its Yemen incursion, dealing with pesky journalists in uniquely gory ways and making random ministers take the blame for misadventure. The price of oil is elevated enough to allow the royal family to do what they do best – buy loyalty, so emerging social unrest in the Kingdom is tamped down. This is all, however, unsustainable. KSA requires oil prices north of $70 to have a hope if balancing their budget.

Grade C – A monkey could have predicted Middle East instability.

The other part of the unrest prediction was with respect to Venezuela. I have been harping on this for several years now and it is finally an accepted mainstream fact that the wholesale collapse of the Venezuelan oil industry is underway which will take decades to reverse. In the meantime, the population starves and Maduro eats steak. There are rumours the military will take action and that maybe the US will intervene but I don’t see that happening. With the United States ion the sidelines, Russia is stepping in as a putative saviour as is China. Money talks, China needs the oil and they don’t particularly care about people.

Grade B – can’t get full marks for stating the obvious.


As I have admitted before, I didn’t really understand what I was saying with my blockchain! prediction, but I liked the term and it made me feel intellectual like, so I used it. Blockchain! Artificial Intelligence! Data Acquisition! These are all real things. How do they get used? It’s all about efficiency. From Suncor’s self-driving trucks to walking rigs to the analysis of the terrabytes of data spewing out of a 15,000 ft horizontal frac, it’s all about using technology (Blockchain!) to reduce costs and owning that technology and data.

Grade B – look, it’s happening.

On the energy front my forecast had an evolving story over the course of 2018 centered on a day of reckoning from at least three years of massive underinvestment in non-OPEC, non shale resources.

This took a while but the gyrations in the market in Q2 and Q3, volatility in Libya, the collapse in Venezuela and the Donald Trump’s Iran sanctions have all brought laser-sharp attention to the issue of the marginal barrel and spare capacity.

The Q4 happened and US LTO production continued its absurdly upward production march. Canada ran into a transportation wall and the US sanctions on Iran proved to be more pussycat than raging tiger. Meanwhile OPEC opened the taps, global growth tripped over a “tradewars are easy to win” signpost and boom, all of the progress of the last year evaporated like rainwater in the desert. Suddenly we are having OPEC+ meetings and production cuts across the board.

What the actual fudge.

So what happened? Aside from the above? The oil market is driven a lot by sentiment. And there is a belief out in the market that there is so much spare capacity that oil prices are going to be lower forever. Look, I don’t buy it and there are a lot of good reasons for that. And I don’t want to spill my 2019 forecast candy, but the spare capacity argument has many flaws. Hint – there’s not a lot and it’s mostly in Saudi Arabia, not Texas.

So notwithstanding a whole boatload of recent FIDs and project announcements (even a few in Canada!), many of these are years off in terms of completion. So we are in good shape for 2022, but expect a rough ride as we learn how much spare capacity Saudi Arabia really has.

Despite arguments that shale will solve all and give the US energy independence, the evidence is all to the contrary. There is a growing concern regarding crude quality as light tight oil has a limited market and the Permian is starting to show cracks which will only get worse a lower prices persist.  In addition, Mexico, Brazil, Southeast Asia and other key regions are underperforming their asset bases and beginning to show some of the effects of underinvestment. Mexico has become a wildcard with the election of the socialist populist AMLO- what are his real plans for Pemex? Will he reverse the liberalization? That’s what the word on the street is. Oil finds are still at decade lows, notwithstanding some promising developments in Africa and regardless of the amount of capital expended in the Permian, other oil needs to come on stream. After the Iran sanction surprise, inventories blew open a bit, but non-OECD storage numbers are down significantly. Demand is way up, even for LNG. Prices feel disconnected from the physical market.

Expect a bumpy winter.

Grade C – Meh

OK, now that 90 days has unwound my oil market prediction, let’s look back on how 365 days of collossally wrong about Donald Trump played out. I had predicted that 2018 would the year Trump softened and became a more benign figure. He must have read that and said “those Stormont guys are treating me very bad”, because the complete 180 from what I thought is pretty spectacular.

What are we seeing? A confused foreign policy stance that includes sanctions on Iran (stick) and a Syria withdrawal (gift to Iran and Russia), the ongoing alienation of traditional allies, NATO and otherwise and a tone deafness to global issues that is nothing short of terrifying.

On the trade and economic front, we are in the middle of a globally destabilizing trade war between China and the US, animosity towards Europe, a revised NAFTA (good) but no reduction in national security tariffs, upended equity markets and crazy volatility.

Against this backdrop, the US economy continues to grow, the deficit is soaring and the US Fed is trying to both slow things down and gather some policy room for the inevitable crash by hiking rates – maginifying all the problems.

As I have said last previously, trade conflicts are like a very aggressive cancer and will spread rapidly with varying unknown consequences, upsetting the benign economic conditions we have been enjoying, raising prices and inflation across the board and potentially stopping global growth in its tracks.

On a final note, the GOP and Trump lost the mid-terms, which were referendum on Trump but clearly they don’t get it. Now we are subject to a single-issue government shutdown which is affecting real people. Staff leave seemingly every other day and there is only so much Mick Mulvaney to go around. And the Mueller investigation continues.

Grade F – should have taken the whole thing back. Buckle up for 2019.


Well, no matter how you slice this one, it’s safe to say that I nailed the US side of the equation.  Even with the EIA revising its production numbers up at the end of 2017 by about 500,000 barrels per day and some softness in prices, the relentless push for production continues unabated in the US. I predicted the US would add some 750,000 to 1 million barrels per day of production and bring it on I say! The sooner we get those barrels in the market the sooner they are gone from the market.

Frac on! Production at Dec 31 2017 was 9.782, current production is 11.700, although after year end 2017, production was adjusted up be some 270,000 barrels per day so the real starting number is somewhere above 10 million. Oh, and did we ever discuss how much growth is coming from the Gulf of Mexico? Didn’t think so. More than 250,000 bopd.

Grade – C, the direction is right, the quantum was off. That said, I expect the 11.700 to be revised down.

In Canada, I predicted a more modest growth in production – probably in the order of 250,000 to 300,000 bpd of oil coming from both oilsands and the conventional/unconventional world. Ironically I was right, so right that now we have to CUT PRODUCTION because we don’t have enough pipeline capacity, rail cars, trucks or buckets to transport it all. Canada’s Field of Dreams – “If you build it, she will cut it”.

OPEC production levels were forecast to be flat year over year unless the US started to get really out of control. Early in the year, the new barrels coming online from Saudi Arabia were really just replacing lost Venezuelan barrels but at the end of the year all of OPEC added production to stem the expected production loss from Iran sanctions and give Donald Trump some low gas prices for the midterms. As an excercize, it will be worth monitoring how much more capacity OPEC has. Discipline is still there in the group and pretty much everyone wants to get off the volatility merry go-round. OPEC production at December 31, 2017 was 32.1 and at December 31 2018 was estimated to be 32.6.

Price of oil

You know, it’s hard to be this smart. Had the oil price figured out right from the get go. Please send any congratulatory cards via email – out of respect for the environment. Wait, what? There was another quarter to go? Sadly, I also had a positive Western Canada Select forecast. There are no words.

So here’s the comeuppance for the smarmy forecaster.

The call for this year was a year-end price of $72.34 and an average price for the year of $67.24. Actuals for the year are $45.41 as at December 31, 2018 and an average for the year of $64.89.

So we blew the spot price but the average looks pretty good. I always thought prices would come down to the end of the year but… ugh.

Grade – D-, clearly I peaked too soon and forgot to study for the final which apparently counts for more than 50% of the grade. At least the average price held up somewhat and prevented a complete withdrawal from forecasting school.

Price of Natural Gas

Ah natural gas, I can’t quit you! Natural gas has been disappointing me and pretty much all of Canada with lousy pricing for the last two years if not an entire decade. Super cold winter, massive snow falls, larger than normal withdrawals from storage, global warming, record power consumption, massive air conditioning use, LNG sucking up every spare molecule, nothing seems to be able to bring prices up. Why? Who knows. Certainly not me.

My year end price call for natural gas was $3.66 with an average price of $3.33. Actual December 31 price was $2.940 and the average was $3.070. If you are keeping track, that actually wasn’t a bad call. Especially if you note that a mere two trading days before the end of the year the spot price was $3.441. Woot!

Grade C – need to do a way better job on natural gas pricing and, well, AECO.

Activity Levels

I predicted 2018 activity in Canada was going to be flat compared with 2017 and, well, I was pretty much bang on.  Which of course sucks. Soft gas prices, uncertainty in BC, pipeline and transportation BS and a complete lack of enthusiasm for Canada in the investment community have held back activity, in particular in BC where activity levels have been surprisingly weak.

Activity continues to be concentrated in the Montney/Duvernay and the Bakken and recent M&A point to a re-arranging of deck chairs. Service company M&A suggests a strategic positioning is happening and the negative sentiment is overplayed, in particular as it regards heavy oil and the Canadian discount. I actually feel a Canadian breakout is coming – there, you heard it here first, load up on Canada or you’ll get left behind!

Grade C – for being pessimistic, you get rewarded

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. I did not predict the current plateau in rig count, but then my forecast didn’t appropriately account for the shipping issues being faced by Permian producers. Rig counts continue to expand marginally, even in the face of pricing pressures. Hard to explain why, but this can’t continue. Labour and materials are tighter, costs are rising, and the brace of DUC’s needs to be culled. However, cash continues to flow in unabated from Wall Street, notwithstanding pronouncements about “capital discipline” and all that jazz.

Grade C – this call was way too easy

M&A Activity

2018 was predicted by yours truly to be a robust year for energy M&A across the board. While we have seen that in spades in the United States as the great Permian portfolio exchange continues, the bug seems to have missed Canada, at least so far.

The problem for Canada is that regulatory gridlock is used by buyers as an excuse to either avoid the sector altogether or put forward absurd or insulting valuations. As with activity levels, this feels both overplayed and self-inflicted. For example, if all Americans buyers and capital providers ever read about the Canadian energy sector is how impossible it is to get anything done, how dumb our federal and provincial leaders are, that we need to cut production and how the carbon tax is the end of the world do you really blame them for putting their shekels elsewhere?

The positive LNG announcement will kickstart some activity on the infrastructure side but it will take time. After all, who doesn’t want a piece of a $40 billion project that requires a $5 billion pipeline?

I also predicted was a US return to Canada at some point, really I thought someone would snap up MEG at what seemed at the time a ridiculous discount. Oh well. Maybe in 2019.

Grade – D. Lots of room for improvement

Canadian Dollar

We predicted strength for the Canadian dollar with the commodity price, but that headwinds such as the pending demise of NAFTA, trade disputes and an overall lack of tax and other competitiveness with our noisy neighbour are killing our prospects. On the other hand, US exports are doing great on the exchange, until they get tariffed…. The Canadian dollar is a mess, trading below $0.77 and likely to show no signs of life until this NAFTA gong show is resolved, then of course the price of oil fell off a cliff.

No grade here – incomplete.


OK, before I run screaming from the room. here was the forecast: Keystone XL and TransMountain will make significant progress and there will be a positive LNG surprise before the year is out.

I’m just going to let that sink in. Based on the facts on the ground, I actually did pretty well.

Sure TransMountain has stopped while the NEB goes back to look at the marine tanker traffic issue and a vague process to complete proper consultation has to happen, the reality is that this project would be deader than a dead parrot if anyone other than the Federal Government owned it. Plus there was an actual shovel in actual ground. I know it’s easy to be skeptical. What isn’t easy is getting a pipeline built – the jury is out for me but I remain optimistic this thing is back on track by the Alberta provincial election in April.

Keystone XL was in a holding pattern at the beginning of the year then TransCanada announced that construction would start in early 2019.Then a judge in Montana pulled a Canada. State Deprtment is on it. Hopefully it makes progress before the GOP loses control. People, wake up. This is a big deal. Bigger than TransMountain. Can anyone lobby on this?

Line 3 work is actually happening and will finish in 2019.

Finally, LNG Canada came back with a positive FID. It is not possible to understate what a big deal this is.

Grade B+. Despite all the noise, Canada is in the early stages of an energy infrastructure boom. Get on the bus.

Stock Picks

OK, energy and energy related stocks have had a rough ride (at least my picks), and if you’d followed my advice you’d be pretty hopping mad (please say you didn’t), but the exercize is it has to be energy and services!

Anywho, how’d we do?

Answer? Really bad.

Overall the portfolio is down 41.6% and is behind its benchmark, which is down “only” 22.3%. So massive underperformance – arg!!

I have no real explanation except that I went for a US small cap for fun and in the equal weighted portfolio that one name is killing me, Eco-Stim. Grr. Actually, who am I kidding, aside from Interpipe and Cenovus this portfolio is a bunch of dogs. Better luck next year… For the record, without the poorly researched small cap name, the decline is a mere 31.3%. Almost respectable! Not.


Grade F– underperformance all around. Thanks all you energy eggheads. Better luck next year, right?

Overall Grade? D. It was going so well then, well, it wasn’t. Can I blame Trump? Why not? Everyone else is…

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