Crude Observations

He Ain’t Pretty

He’s my forecast…


Many apologies to the Hollies for that fairly cheap appropriation of one of their biggest commercial hits but, as this self-isolation social distancing thing continues I find myself going ever deeper down the rabbit hole of music that I used to regularly listen and waxing nostalgic about repressed memories.


Moreover (what a great word), it seems apt as a title for my first quarter report card on my forecast. It is not pretty. It is downright ugly. You can rest assured that there is no real passing grade in anything I had to say, although there are a few directional nuggets in there that I got right.


It all brings to mind what is happening with all our kids currently locked out of school and going through the home schooling motions as educators across the world wonder what to do. For the most part, the consensus seems to be that if you were passing up until the day the music died, then you get a free pass to the next level, even, apparently, for some university and professional endeavours.


With that out of the way, I am going to say right off the bat that this Fearless Forecast report card is going to do the same. I am going to record it as a “pass”, sort of, and move forward, confident that I accomplished what I set out to do.


I know last week I promised that I would review the Forecast and leave it in place for the balance of the year just to see how things play out as we dig ourselves out of this Black Swan nightmare scenario. However, upon further reflection, I think that is in many ways a copout. So instead I am going to review what I said and why I said it, assign a directional thumbs up or thumbs down and then attempt to recast some of the general themes for the new COVID reality.


One thing I will not do is get dragged into any COVID related forecasts whether for duration, mortality or broad infection rates. For my own sanity, I will leave that to the medical professionals and the emerging profession of Twitter-based eco/epiologist who apparently have nothing better to do than read study after unrelated article and form definitive opinions based on gut and unfounded leaps of logic.


So, with all that out of the way and without further ado, here goes nothing. And, as always, a warning. Please do make investing decisions based on this forecast, unless you want to, I can’t really stop you, but seriously folks, that isn’t the purpose here. And when you see my stock picks, you’ll know why.



Broad Themes


Interestingly, my original forecast posited that the theme of civil unrest would still be topical, but that the largest influence on the globe would be the runup to and the eventual result of the US Presidential Election. I also suggested that Trump 2.0 would run on his economic record as opposed to the nationalist side-show that underpinned the 2016 run.


In retrospect, this seems really naïve, but absent COVID, probably had a good base in reality. More on civil unrest in a bit, but I do think the economy will still be front and centre in the upcoming election on the GOP side with Trump either trying to ride a wave of post-pandemic economic recovery or, in the event this takes longer, a campaign based on his proverbial “Only I can fix this.” The Democrats will clearly make the election about the pandemic response and the subsequent economic carnage.


Long story short, notwithstanding the pandemic, 2020 is still all about the US election, because the result will set the trajectory of the (as yet still) free world for the next four years.


Fortunately for Trump, his late 2019 and early 2020 already faltering economy and disastrous trade policies will be a distant memory come election season.


Unfortunately for Trump, the pandemic will be the election issue and Trump-Pence will lose to Biden-Harris in November. That was my call in January and it stands.


Looking around the rest of the world, I had expected that the Iran Crisis would continue to percolate and I expect that will continue to be the case, especially now that energy prices have collapsed and Iran has been ravaged by the pandemic. Internal unrest is likely to continue to rise in Iran and the US shows no sign of relaxing its pressure on the Iranian regime. As it becomes more isolated and desperate, it is not unreasonable to postulate, as many commentators have, that the Iranian regime will seek to destabilize other parts of the Middle East, in particular its arch nemesis Saudi Arabia, dragging the United States reluctantly into deeper conflict than it wants.


Look, I know it sounds heartless, but humans, for all their nobility and charity in times of crisis, are still angry beings, given to waging war and fomenting conflict at will. A pandemic isn’t going to stop that, and in all reality may serve to exacerbate already volatile situations.


That’s why I believe that many countries in Africa are already on the edge (Burkina Faso, Ethiopia, Sudan) and places like Libya will remain powder kegs.


Aside from Iran, I suggested two major areas that had the potential to spiral out of control if left unattended.


The first was Venezuela which is in its 119th year of economic stagnation. With intensified US sanctions and a Russian benefactor who appears to be losing interest, Venezuela is an ongoing humanitarian crisis that threatens to boil over in a pandemic induced civil war.


The second area I flagged is the disputed Kashmir, a traditional area of conflict between India and Pakistan that has been threatening to blow up for decades. With the entire Indian sub-continent currently on lockdown, this will stay quiet for the time being, but India’s Modi has imperial type aspirations and everyone has a nuke. As I said in January – you have been warned. Pay attention.


On the energy and environment front, I suggested 2020 was going to be a year of transition and that the story wasn’t going to be Light Tight Oil. Rather it was going to be ESG (Environmental Social and Governance), a movement led by uber-boring rich white dudes like Steve Schwartzman, CEO of Blackstone (largest private equity fund in the world), former Bank of Canada/Bank of England Governor Mark Carney and other investor groups.


For a few months, this looked downright prophetic, but then with the crash in oil prices, all such conversation has taken a back seat.


But this doesn’t mean by any stretch of the imagination that the climate crisis has gone away. Opportunists on both sides of the debate are using the pandemic to reinforce their positions.


“If you think this is bad, wait for climate change”


“See how much we need oil and gas?”


“If we can mobilize this much capital for a disease, why can’t we do the same for a Green New Deal?”


“The climate movement has been set back a decade by this.”


Where is the answer? Somewhere in between. Climate still matters. So does cheap and affordable energy. There is no denying the critical role that fossil fuels play in keeping our supply chains moving. There is also no denying the disruptive nature of oil price volatility to global economies. If ever there was a case to diversify the energy mix away from oil it is made by the spurious and injurious actions of an impetuous millennial leader of a dictatorship with too much control of a critical resource.


Accordingly, I still think 2020 will be the year where emissions reducing solutions like nuclear power come back to the fore – and not just from fringy right-wing web sites, but instead an institutionally driven initiative from many levels of government.


And with coal now the most expensive fossil fuel out there, look for the transition away fromcoal to natural gas, renewables and nuclear to accelerate.


I suggested there is still a leading role for Canada to play in all this. Canada is already a global leader in ESG influenced fossil fuel production and we are a leading exporter of next generation nuclear technology.


On the oil and gas front, I suggested that with the Permian not being the main focus, we are projecting significant investment in offshore Africa, Latin America and non-Iran OPEC but not Canada. And up until March 7, that was exactly what was happening.


Grade? Pass – but you knew that.


Price of oil


Alright folks, here we go. This is the one everyone loves, the glory call and the one you should be basing your investment decisions on. Well here’s what I did at year end. After having my keester spanked by prices last year, I decided that I was going to play it safe. I was going to make a conservative call. Then that thing that happened, happened. And suddenly I look like a raging lunatic. To my credit, I was looking pretty good. Until that thing that happened, happened.




First off, I expected oil and gas demand to increase by about 1%, as it does every year.


Against that was record oil production in the United States offset by big cuts from OPEC/NOPEC and substantial spare capacity in Saudi Arabia. Inventories were to decline, there was a political risk premium, recovering GDP growth around the world… Against that was EV growth, what to make of Venezuela and Libya, cheating.


I was concerned. So I low balled my call. I went with sideways pricing because I thought there was too much supply. Then I got knocked on the head. 25 million bpd demand destruction starting Mid-March. Price war. To my credit, I also predicted lots of volatility!


My year end price for WTI was $62.17 and my average price for the year was $60.38. At the end of Q1 the price was $20.48 and the average price $46.60.


Look, the elephant in the room is big. Last week I said shale as we know it is done. The price prediction above? That’s 2021. I am revising my price deck as follows: both the average and the year end price are hereby reduced by $20. Arbitrary but necessary. Global growth in consumption will be -2%


Grade – Pass.


Price of Natural Gas


Ah natural gas, even in a pandemic I can’t quit you!


The original call was based on gas consumption in the US being way up, exports of LNG growing rapidly and exports to Mexico also rising. At the time production was also rising, with associated gas from the Permian is a major contributor. But even then, growth wasn’t limitless. I said 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. It should be noted that as of the end of the week, gas production was down 5 Bcf in the US. Rigs are being parked and with the shale activity pulling back, more constraints are coming.


All that said, as a domestic market, the pandemic hasn’t been as bad for gas as it has been for oil.


My year end price for natural gas (NYMEX) was going to be $3.52 and an average price will be $2.96, up marginally from last year. I also predicted a better year for AECO than I think many Canadian producers are used to. So far, at the end of Q1 the price was $1.64 and the average was $1.87. With demand destruction, it is hard to stick to my earlier call… but I am going to. I think supply is going to come off quicker than expected and when the continent gets back to work, it won’t be easy to turn it back on. God help me.






The prediction in January was that US producers would take a breather in the Permian and that with scarce capital the pace of completions would slow and the rig count would stabilize at around the 600 level.



We projected that US production would continue to grow albeit slower. Based on year end production numbers of 12.9 million bpd of production we projected an exit production level of 13.3 million with additions happening in the second half and some decline in the first half. Under this low growth scenario, I predicted that drilling activity would decline by 10% year over year.


As luck would have it, I was half right. The rig count actually dropped 10% last week and production will indeed decline in the first half. And keep declining in the second half. And on into 2021.


Quarter end production estimates from EIA were around 13.0 million bpd. These are wrong. My new exit rate of production is 11.5 million bpd.



In Canada, I was pretty bearish while we waited for egress issues to be solved. I suggested that activity levels would mirror last year with brownfield in the oilsands and pockets of conventional unconventional (tight oil, deep basin, condensate, liquids rich) activity in places like the Duvernay/Montney/Viking and the Bakken but not much in between.


So no growth above replacement of natural declines. Park those rigs for better times. Even ex-demand destruction, without takeaway capacity, Canada was a challenge.


I think this is now a best case scenario for Canada. With the capex cuts announced recently, it will be hard to hit, but at least we don’t have the double existential whammy of high declines and a giant debt wall. 2021 can’t come soon enough for Canada’s oilpatch.


I suggested that OPEC production levels would depend on what happens with the new OPEC/NOPEC agreement at the various jump-off points through the year. The key to the agreement was the Saudi/Russia collaboration which was likely to continue at least until June but exploded on March 7. I thought OPEC/NOPEC output would be flat year over year and, ironically, I think that is a good forecast. It’s what happens in the middle that’ll hurt.


The rest of the world was expected to deliver limited growth but acceleration as the year progresses with new projects in the North Sea, investments in Africa, Latin America, etc.


This is now clearly all out the window. Capex globally is likely set back at least three years. Ironically, even with all this demand destruction, in any “return to almost normal” scenario, we actually need production growth.


Grade – pass


M&A Activity


I expected a reasonable trend in M&A from 2019 to continue into 2020 as property consolidation, non-core asset sales and private equity investment all remain robust as the industry adjusts, yet again, to a new normal. I predicted M&A activity to be broadly based – upstream, downstream, oil, gas, services and everything in between in the United States but also increasingly in the great Canadian value play.


While this is clearly delayed as companies figure out where they stand or if they are even still solvent, out of chaos is opportunity so we anticipate that second half M&A activity is going to be pretty robust provided the capital markets don’t seize up. We expect US and international capital to start sniffing around Canada by the end of the year.


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.


These projects will continue notwithstanding the pandemic and price rout. These are long term projects in the national interest which underscores the fact that Canada is a currency advantaged, rational valuation and stable market for consolidators.


And I’m sticking to that theme.


Canadian Dollar


We predicted stability for the Canadian dollar this year and, aside from a 15% plunge due to the oil price pandemic double whammy, the Canadian dollar should actually remain a fairly stable currency, even with the massive stimulus being thrown at the economy since, all things being relative, Canada was pretty stable before and will be after. I expected the Canadian dollar to reach perhaps as high as $0.78 by year end – why change now.




Finally, right? I predicted that the early to mid stage of an infrastructure supercycle in Canada would continue well into the mid-2020s. My predictions…


  • Line 3 complete and operational by year end
  • TransMountain Expansion well underway with multiple spreads operating during the year in Alberta and BC
  • Coastal Gas Link continuing notwithstanding current challenges
  • Keystone XL – at the time without an FID was a real downer for me. I expected it to be a victim of the US election. Kudos to Jason Kenney, the Alberta Government and TC Energy for inking a deal at the darkest hour to get this critical energy infrastructure moving forward.


I thought we might get one more LNG FID this year but I no longer see it. But with the host of multi-billion and hundred million-dollar petrochemical plants on the books as well as wind and solar investments and a federal government intent on opening the fiscal hydrant, spending is going to happen. In Canada of all places!


Stock Picks


Wow. My energy stocks. Whoop dee doo. This, as they say, is going to be interesting.


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


Let’s review these genius picks.


Pick #1 was Peyto. Gassy. Makes money in lousy markets.


Pick #2 was Seven Generations. No real logic. It’s more oily than Peyto with similar fundamentals. Merp.


On the large cap Canadian service side, I picked Enerflex mainly for its global market and relative stability.


Pick #4 was TransAlta Renewables, just to show that an oil and gas scribe can grow adapt to a new market..


I gave up on picking a US producer and instead went with Saudi Aramco. Hey – in the current market, if you have to own an oil and gas stock, you may as well own the one that controls the market.


On the service side, I also went global and picked Forum Technologies. Beaten down, chewed up and spat out. What could go wrong?


Stock Dec-19 Mar-20 % Change
Peyto 3.80 1.49 -60.8%
Seven Generations 8.47 1.55 -81.7%
Enerflex 11.98 5.42 -54.8%
Transalta Renewables 15.52 14.87 -4.2%
Saudi Aramco* 35.25 30.15 -14.5%
Forum Technologies* 1.68 0.18 -89.3%
Average -50.9%
TSX Capped Energy 145.96 60.12 -58.8%
*Not currency adjusted


Wow. Maybe it is time to invest in renewables. (ducks)


Grade? Pass.


Office Cat Week 3


It appears that I may have been abandoned this week as there has been a notable lack of backup. Perhaps he is all done with my incessant video conference calls or maybe it has something to do with my office speak. Maybe it’s because I watched Tiger King…


I can only hold out hope for renewed camaraderie next week.


Prices as at April 3, 2020

  • Oil prices
    • Oil storage was up
    • Production was down marginally
    • Noises about major cuts to production rallied prices
  • Natural Gas
    • Storage below last week, but historically very high; consumption down; production flat; exports flat.
  • WTI Crude: $28.79 ($21.80)
  • Western Canada Select: $12.56 ($5.55)
  • AECO Spot: $1.78 ($1.81)
  • NYMEX Gas: $1.604 ($1.615)
  • US/Canadian Dollar: $0.7054 ($0.7130)



  • As at March 27, 2020, US crude oil supplies were at 469.2 million barrels, an increase of 13.8 million barrels from the previous week and a increase of 13.1 million barrels from last year.
    • The number of days oil supply in storage is 30.1 which is 2.0 above last year at this time.
    • Production was flat for the week at 13.000 million barrels per day. Production last year at the same time was 12.200 million barrels per day.
    • Imports decreased to 6.047 million barrels from 6.117 million barrels per day compared to 6.793 million barrels per day last year.
    • Crude exports from the US decreased to 3.155 million barrels per day from 3.850 million barrels per day last week compared to 2.723 million barrels per day a year ago
    • Canadian exports to the US increased to 3.410 million barrels a day from 3.367 million barrels per day last week
    • Refinery inputs decreased during the week to 14.898 million barrels per day
  • As at March 27, 2020, US natural gas in storage was 1,986 billion cubic feet (Bcf), which is 17% above the 5-year average and about 77% higher than last year’s level, following an implied net withdrawal of 19 Bcf during the report week
    • Overall U.S. natural gas consumption fell by 7% during the report week.
    • Production was down 1% for the week. Imports from Canada fell 14% from the week before. Exports to Mexico were down 2% week over week.
    • LNG exports totaled 70 Bcf
  • As of April 3, 2020, the onshore Canadian rig count decreased 13 to 41 (AB – 29; BC – 10; SK – 1; MB – 0; Other – 1). Rig count for the same period last year was 87.
  • US Onshore Oil rig count at April 3, 2020 is at 562, down 62 from the week prior.
    • Peak rig count was October 10, 2014 at 1,609
  • Natural gas rigs drilling in the United States is down 2 at 100.
    • 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 flat at 18.
    • Offshore peak rig count at January 1, 2015 was 55

US split of Oil vs Gas rigs is 86%/14%, in Canada the split is 66%/34%


Trump Watch: Tells 3M to stop selling N95 masks to that dastardly Canada country.

Kenney Watch (new!): Mr. Kenney bought a pipeline

Trudeau Watch (for balance): More money coming, but you gotta wait

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