Crude Observations

Will They or Won’t They?

Wow – that was quite a week in the oil market, with prices collapsing drastically at the end of the week amid much market concern about OPEC cuts and US shale.


Part and parcel of this spring time swoon, we have reasonably accurate and timely US data racing far ahead of what we see internationally (which is by and large a mishmash of hopelessly out of date and unreliable trailing data), leading many to, erroneously, assume that the OPEC cuts are not working – either in terms of absolute reductions or time.


This leads to, of course, a vortex of contrarian data signals, imbalanced interpretations of the implications of this data and, to put it politely, mild panic. Or, Tuesday in the oil patch.



All kidding aside, this misses the forest for the trees as there are a lot of reasons to be longer term constructive about oil even as prices seem to fall off a cliff.


To figure that out, I’m going to trot out some of the same concepts I’ve been reviewing for a while, but it never hurts to do a review.


Production is the amount of oil and liquids produced every day across the world. This is of course the big headline number that everyone pays a lot of attention to.  Current global production is about 90 mm barrels a day. Most of that production is self-reported and unverified. Hmm.


Inventory is where production that isn’t immediately consumed ends up. This is the vast network of onshore and offshore storage that exists around the world. Current inventory is estimated to be about 3 billion barrels globally with about 1,100 million of that in the United States (includes the SPR). It is widely agreed that inventory needs to come down by some additional 250 million barrels globally and about 150 million barrels in the United States  – so 400 million barrels, remember that now.


Supply is really the sum of production and inventory. There is a lot of it. I’m not even going to talk about easily accessible reserves, which are really a form of inventory.


Demand is the estimated amount of oil and liquids required around the world on a daily basis to meet our energy needs. Demand is currently around 90 million barrels a day.


Demand Growth is an estimate based on economic growth and price of what the world will require in the next period or periods. Current demand growth is runn9ing around 1.5 mm bpd and is expected to soften in the next year to 1.25 mm bpd.


Consumption is how much oil is actually consumed day to day. This is often in balance with demand but can just as easily get out of whack due to various factors such as refinery run rates and the like. Interestingly, the oil consumed every day actually comes out of storage or inventory.


Balance is a condition where production equals consumption, meaning that on average, on a daily basis, there are no additions to inventory. Balance doesn’t mean that inventory is being drawn down. In order to achieve that, production must be cut or demand must grow.


OPEC controls about a third of global production, or roughly 30 million barrels a day.


OPEC cuts are the production cuts agreed to by OPEC and a select group of Non-OPEC countries to help stabilize the oil market and, eventually, bring down inventories. These cuts have averaged about 1.8 mm and have helped bring the market into balance, or slightly negative, which, finally, starts to eat into inventories.


US Shale is another term for tight oil which comes mostly from formations in and around Texas and North Dakota. Shale accounts for about 4.5 million barrels of American production. Since OPEC agreed to cut production in November, overall US production has increased by 600,000 barrels per day, with a lot of this offshore production (betcha didn’t know that!) but with the big spike in land based rig counts, it is anticipated that this will continue upwards going forward, although less so on the offshore side.


Decline rates and depletion are the year over year declines in production hat need to made up for in new wells completed. This runs about 6% per year. 600,000 bpd in the US or 4.5 mm bpd globally.


Months are a unit of time, equal to four weeks. Six of these months are what the OPEC cuts were designed to last for. Four of these months are how many have passed. Two months is the information lag for what is happening in the world outside of the US (i.e. we are soon to have really current March info).


Experts are the people who put all of the above together and prognosticate about where the market is going. In theory they have access to more information than your average Joe and accordingly should have highly informed opinions based in irrefutable fact about the direction the energy market.


Investors are sheeple who move in and out of the market based on what experts tell them and are prone to group think and, as a class, are generally most interested in data and conclusions that reinforce what they already think.


So, add it up. Production and consumption are in balance, mostly, as at December 2016. Demand growth is moderating but still there. Production in the US is growing, OPEC cuts of 1.8 million bpd are in place. Aside from a couple of hundred thousand bpd in Canada, nowhere else in the world is growing production. So, assuming the the market is unchanged as of today, this means that inventory is reducing by, on average, somewhere between 1 mm and 1.8 mm barrels per day which means that to restore “supply balance” (400 mm barrel reduction from above) to the market at these levels will require something in the order of another 6-12 months months. From the lst measurement period where we have accurate data which will be March 31, when we get it in three weeks.


Apparently this type of market certainty isn’t good enough for so for this past week and a bit, prices have fallen 10% catching both Experts and Investors by surprise.


Put another way, notwithstanding evidence and indisputable math that the slow rebalancing is finally bearing fruit, with incremental reductions in US inventory, continued lower OPEC production and high adherence to quotas, it appears that, rather than wait for additional data on global supply, Investors prefer to hang their hats on short term data points, such as weekly rig counts and a 28,000 barrel per day week over week production increase in the United States to “sell the market now dammit”.


So? That’s oil prices. But what about OPEC. Will they or won’t they?


Well, range-bound prices, a need for more time to fix the market and a lack of informational clarity. US tight oil companies who couldn’t care less now that they are getting capital again. And an OPEC meeting at the end of May to decide what to do with the cut. What should we expect?


Well clearly we’re not out of the woods yet – Curse you American Tight Oil and opaque data! Seriously though, as I’ve said here previously, the ability of shale to add production is over-estimated by the market, but… it is nonetheless real and could derail a recovery if KSA and the rest of OPEC gets fed up. So really the shale fellows should exercise some restraint (not gonna happen). Plus, even if shale cuts back, the voracious appetite of refineries would just attract more imports.On the other hand, $70 oil doesn’t get you elected in many places outside of Texas, so politicians need to be aware of gas prices – Drill Baby Drill!


So really, it all comes back to OPEC. Isn’t that amazing how it always seems to come back to OPEC.


So? Will they or won’t they? Of course they will. All this means that OPEC needs to extend its production cut in order to achieve its $70 price target. I suspect the decision has already been made. I suspect that the decision was made back in November to tell the truth. Which of course works out great for anyone planning to IPO a gigantic energy company sometime in 2018. And if you are a Canadian or US-based producer? Carry on I guess.


Random Thoughts Plus Another Election


In yet another in a series of seemingly unending Canadian and US elections impacting the energy industry, we have the BC provincial election coming up May 9th. What’s at stake? New energy infrastructure. The Christy Clark Liberals have had a reasonably successful run in power. The province leads the nation in GDP growth, house prices, lack of affordability and marijuana grow ops (just a guess on that one). Unfortunately she hasn’t delivered the LNG boom as promised (hey BC, it’s a tough market – welcome to our world) and has come out in favour of the TransMountain pipeline project. Running against her is a high-spending, populist, anti fossil fuel NDP party and a surprisingly strong Green Party who, as expected, is anti-development. The NDP currently leads in the polls. There is a very high risk that should the NDP win a majority or minority government or force the Liberals into a minority government that the TransMountain project will face severe delays and that the major LNG projects will finally be dead in the water.


While the energy sector would survive, this would be a tragedy for the economy and development in Western Canada. I get that some of these projects are controversial, but if you hang up the “closed for business” sign, pretty soon other parts of the economy start to fall apart. An economy needs to be based on something more than lifestyle. I don’t even dare to make a prediction because the province is pretty divided, but if I forced to make a choice, I would go with the Liberals returned to power with a slight majority.


Finally, today is the anniversary of a great many things. One year ago this week, the Fort MacMurray wildfires and evacuation held a country transfixed and the recovery is still years away. Two years ago today, the Rachel Notley led NDP swept the PC party from its 40 year uninterrupted run of power in Alberta (and many will say – the recovery is still years away!). As the picture above indicates, today is also “Cinco de Mayo”, a marginal Mexican holiday celebrated in drunken fervour everywhere in the Untied States except Trump properties. Finally, on this day two years ago, one of my favourite actors passed away – I guess it’s time to pull out those old Rockford Files DVDs.


Prices as at May 5, 2017 (April 28, 2017)

  • The price of oil got crushed during the week before a small rally on Friday on the usual storage/OPEC/shale dance.
    • Storage posted a smaller than expected (wanted really) decrease
    • Production was up marginally
    • The rig count in the US continues to grow, although at a slower pace
  • Natural gas was flat during the week, avoiding most of the oily drama
  • WTI Crude: $46.35 ($49.33)
  • Nymex Gas: $3.268 ($3.276)
  • US/Canadian Dollar: $0.7324 ($ 0.7335)


  • As at April 28, 2017, US crude oil supplies were at 527.8 million barrels, a decrease of 0.9 million barrels from the previous week and 15.7 million barrels ahead of last year.
    • The number of days oil supply in storage was 31.0, behind last year’s 34.0.
    • Production was up for the week by 28,000 barrels a day at 9.293 million barrels per day. Production last year at the same time was 8.825 million barrels per day. The change in production this week came from a small increase in Alaska deliveries and increased Lower 48 production.
    • Imports fell from 8.,912 million barrels a day to 8.264, compared to 7.660 million barrels per day last year.
    • Refinery inputs were down slightly during the week at 17.177 million barrels a day
  • As at April 28, 2017, US natural gas in storage was 2.256 billion cubic feet (Bcf), which is 16% above the 5-year average and about 14% less than last year’s level, following an implied net injection of 67 Bcf during the report week.
    • Overall U.S. natural gas consumption was up by 3% during the week – a slight increase in power demand was offset by decreases in retail and commercial demand
    • Production for the week was flat and imports from Canada rose by 17% from the week before due to pipeline maintenance
  • As of May 1, the Canadian rig count was 85 (13% utilization), 66 Alberta (15%), 13 BC (18%), 6 Saskatchewan (5%), 0 Manitoba (0%)). Utilization for the same period last year was below 10%. With breakup now on, this count isn’t expected to rise significantly for the next month or so.
  • US Onshore Oil rig count at May 5 was at 703, up 6 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 173.
    • 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 1 at 18
    • 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%


  • Earnings Review – a veritable gusher of cash – thank you OPEC
    • Offshore rig count at January 1, 2015 was 55
    • CNRL – Q1 2017 funds from operations of $1,639 vs Q1 2016 of $657
    • Shell – Q1 2017 cash flow of $9.51 billion vs Q1 2016 of $0.7 billion
    • Exxon – Q1 2017 net income of $4.01 billion vs Q1 2016 of $1.81
    • Imperial – Q1 2017 net income of $333 million vs Q1 2016 loss of $101 million
    • Conoco Phillips – Q1 2017 adjusted earnings of ($19 million) vs Q1 2016 of ($1.2 billion)
    • Husky – Q1 2017 Funds from Operations of $709 million vs Q1 2016 of $434
    • Enerplus – Q1 2017 Adjusted Funds Flow of $119 million vs Q1 2016 of $42
    • Tourmaline – Q1 2017 cash flow of $293 million vs Q1 2016 of $159
    • Seven Generations – Q1 2017 funds from operations of $272 million vs Q1 2016 of  $110
    • Arc Resources – Q1 2017 funds from operations of $189 million vs Q1 2016 of $150
    • Encana – Q1 2017 non-GAAP cash flow* of $278 million vs Q1 2016 of $102 (*no, I don’t know what this is either – maybe some hocus pocus?)
    • BP – Q1 2017 adjusted earnings of $1.51 billion vs Q1 2016 of $532
  • Pembina-Veresen announced they have entered into an arrangement agreement to create one of the largest energy infrastructure companies in Canada with a pro-forma enterprise value of approximately $33 billion
  • Suncor announced the restart of its Mildred Lake oil sands facility and is currently shipping 140,000 bpd and expects to be back at full capacity by June (adding to inventories of course)
  • Trump Watch: Congress voted to repeal and replace ObamaCare with something decidedly less people-friendly. Let the Senate shenanigans begin!
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