Well I sure blew the timing on that one, didn’t I.

 

If only I had waited a week for my election cheat sheet I would have so much… umm… more… to say. As the expression goes, a week is a lifetime in politics, although this past week has been more like 1001 Arabian nights.

 

But what do I really want to say? Do I actually want to wade into the latest iteration of the chaotic fever swamp that is Canadian politics? Is it really that important to discuss what I understand to be called “cancel culture” and the dredging up of whatever craptacular and colossal error in judgement, insensitive or offensive speech or post or photo or grainy video exists – all in the pursuit of shaming, embarrassing, lambasting and sidelining as many would be politicians as possible?

 

Do I really want to do that? Kinda. But I won’t.

 

Do I have anything to say about the last week? I have lots. Plenty. A whole bunch. But that’s not what this blog is about or for. There are plenty of people who have opined on recent events who are much more affected, knowledgeable and otherwise in tune with how to address this. I wish them well. I will leave it thusly – Justin, if you want to change the subject, maybe start talking about SNC Lavalin.

 

So, what do I really want to talk about? Saudi Arabian nights, more specifically, last Saturday night. And oil, of course. Saudi oil in particular.

 

Unless you were living under a rock, you may have noticed that there was a pretty big deal that happened in Saudi Arabia last Saturday when several oil-related targets were hit by what initially appeared to be drones.

 

At first, I dismissed this as nothing more than random Houthis taking potshots at pipelines and border facilities but upon closer inspection, it was obvious that this was in fact a really big deal and the more I dug into it and thought about it, the bigger it got.

 

The strikes were at two locations, the first being the Khurais oilfield area, the second largest in Saudi Arabia. This area is massive so a strike there is more for show than anything and although production was quickly shut down, it is not as devastating to the Kingdom as you would think because it can be brought back into play relatively quickly.

 

The second strike was much more impactful, that was the bombing of the Abqaiq facility.

 

The Abqaiq facility is where approximately 50% of Saudi oil production is processed for export/storage/refining. The reason why this facility is so critical is that it is the primary and largest processing centre for Saudi sour crude (their primary product), which is filled with all sorts of toxic nasty stuff like deadly hydrogen sulfide. The facility separates the oil from gas liquids and water and sand and then pipes the resulting oil to various locations for refining, petrochemical production and/or export.

 

In a nutshell, no facility, no processing. No processing, no exports. No exports, no money for Saudi sheiks. And the longer the shortage continues the more other inventories are drawn down and the higher the pressure on oil prices. With limited extra capacity except from sanctioned countries like Iran and Venezuela, every passing day is a threat to the global energy ecosystem and the economy.

 

That said, we are fortunately not at a particularly critical stage. So we should all remain calm, and think rationally about what’s next.

 

The world is in theory awash in oil, from overflowing storage tanks (not really, but there is lots) to runaway production growth in the United States and the availability of spare capacity in other countries such as the United Arab Emirates and Kuwait so the price impact of a temporary disruption while large is definitely manageable. Saudi Arabia has enough storage to meet all its contractual requirements and has already begun recovery operations, restoring as much as 2.5 million barrels per day of though put, but a very real 2.5% reduction in global supply matters, especially if that reduction comes from the world’s swing producer.

 

In its very awkward Arab language press briefing on Tuesday, the Saudis managed to soothe oil market fears by saying they would have production “capacity” back up to 10 million barrels per day by the end of September and 11 if not 12 million barrels by November. This of course is smoke screen nonsense. They could have production capacity of 20 million barrels but if they are unable to process it, who cares. If anyone understands the implications of “capacity” and the lack of ability to do anything with that capacity whether through processing or egress, it’s us dumb canuckleheads with our landlocked oil and natural gas. At any rate, the mythical Saudi production restoration also includes withdrawals from their own inventories, which are estimated to be between 30 million barrels and 80 million barrels as well as support from the UAE and Kuwait. I leave it to you to figure it out, but my view is that this is lipstick on a pig.

 

The actual key to this is how long will it take to restore operations at the sprawling Abqaiq complex and on this, the message was even murkier. Some has been restored, but the strikes were surgical and clever. They took out towers and processors for each stage of the process and replacing anything in a plant is a time-consuming process measured in months, not days and weeks. I just saw on twitter some photos from the plant that show that entire towers need to be replaced, never mind the photos of journalists wandering through the site taking pictures with their phones, no safety gear or breathing apparatus visible, suggesting that a plant that deals with dangerous H2S gas is very much shut down.

 

So, after all this very carefully orchestrated song and dance routine obviously designed to calm oil markets and protect the upcoming Aramco IPO, I am left with the distinct feeling that this really big deal will have ramifications and ripple effects in the oil market for years.

 

That this attack was perpetrated seemingly so easily should serve as a wakeup call for a world that is still dependent on Saudi and Middle East oil. The conflicts and the proxy wars that are constantly being waged in that region do matter and the uncertainty and risk is only going to get more intense.

 

It goes without saying that this is just the latest skirmish in the ongoing battle for regional supremacy between Saudi Arabia and Iran and that a proportionate response is in the works, because if it isn’t, Iran will strike again. Whether the cruise missiles and drones originated inside of Iran or were launched by Iranian proxies is irrelevant. The only country in the region that stands to benefit from the strikes is Iran and even if it was Yemeni Houthis, they would only do so on the orders of their Iranian paymasters.

 

Many people have questioned why Iran would do such a thing, seeing that they are under tight sanctions from the United States, the traditional policeman in the Middle East and an ally of Saudi Arabia. But the real question that should be asked is why did they not do it sooner.

 

While Iran is indeed under sanctions and suffering as a result, they can afford to play the long game against the United States and Saudi Arabia, which they are doing, because they are going to win.

 

Donald Trump’s strategic bumbling in the Middle East generally and dealing with Iran specifically led directly to this attack and his inability to articulate a strategy to contain Iran except “get a new deal” gives Iran the green light they want to lash out and set the terms. He doesn’t want a war. He can’t win a war. Iran knows this and therefore they aren’t afraid of the Paper Tiger United States. They were afraid of John Bolton – terrified actually, but Trump fired Bolton and 5 days later Iran struck at the heart of the global energy industry. It doesn’t take a stable genius to draw those lines.

 

The bombing was Iran calling Trump’s bluff. And all the United States has done is announce additional sanctions. Whoop-de-doo. Point to Iran. It’s like in a knife fight, where one party nicks the other in the cheek and dares them to actually fight back – and the other party chucks their blade and runs for the hills. Iran is now free to strike at the Saudi oil industry at will.

 

So, while we await the tit for tat Saudi response, it’s safe to say that Iran has won this round handily.

 

So what does this mean for the global energy industry? That could take up to 25 blogs to write up, so instead I’ll toss out a couple of obvious platitudes.

 

First off, the risk trade for oil is back on. I realize it isn’t reflected in the price yet due to hefty surplus supply, Saudi smoke and mirrors and a generally uneasy economic environment but it is there and will only increase as things escalate which they inevitably will.

 

Second, I think we can all agree that continuing to rely on unstable foreign countries for our collective energy security is a really dumb idea. If only there was a country or region that was politically stable, had ample reserves and an ability to increase production to reduce reliance on Middle East oil and isn’t a powder keg of regional rivalries liable to blow up at any moment and collapse global oil production.

 

Oh wait, there is.

 

It’s us.

 

It is sad that the prospect of a shooting war in the Middle East or a terrorist bombing is required to serve as a wake-up call for infrastructure development but it is what it is. Our federal government needs to engage in a serious discussion about what Canada’s role is actually going to be in a world where up to 5% of the world’s oil production can be taken offline for who knows how long by 17 missiles and a bunch of drones.

 

That dialogue should be happening now and ongoing and should include our largest customer and ally to the south, regardless of who is in charge of either government. We need, the world needs, for our oil to have access to export points south, west, east and north. It’s not a commercial play, it’s actually a strategic imperative.

 

We must still engage in the balancing of the environment and the energy economy and act with purpose to develop renewable resources and responsible stewardship of the land. But… it is long past time for Canada to step up and become the global player it should be and help alleviate the risk premium in what is still the most important commodity in the world and will be for my lifetime.

 

Hopefully after this election is finally over and the stupidity subsides we will see this happen. But I won’t hold my breath, maybe after the shooting starts in earnest.

Prices as at September 20, 2019

• Oil prices – Up then down,but really up
  • Storage posted an increase week over week
  • Production was down
  • The rig count in the US was down and Canada was down
  • Prices rallied early on Saudi supply disruption. Gave back some ground later.
  • Natural gas storage was up and remains higher than this point last year

• WTI Crude: $58.47 ($54.87)
• Western Canada Select: $45.42 ($41.72)
• AECO Spot : $0.8830 ($0.896)
• NYMEX Gas: $2.536 ($2.618)
• US/Canadian Dollar: $0.7555 ($0.7570)

 

Highlights

• As at September 13, 2019, US crude oil supplies were at 417.1 million barrels, a increase of 1.1 million barrels from the previous week and 23.0 million barrels above last year.
  • The number of days oil supply in storage is 24.2 compared to 22.4 last year at this time.
  • Production was flat for the week at 12.400 million barrels per day. Production last year at the same time was 11.000 million barrels per day.
  • Imports rose to 7.050 million barrels from 6.725 million barrels per day compared to 8.024 million barrels per day last year.
  • Exports from the US fell to 3.175 million barrels per day from 3.295 million barrels per day last week compared to 1.828 million barrels per day a year ago
  • Canadian exports to the US were 3.483 million barrels a day
  • Refinery inputs fell during the during the week to 16.707 million barrels per day
• As at September 13, 2019, US natural gas in storage was 3.103 billion cubic feet (Bcf), which is about 2% lower than the 5-year average and about 15% higher than last year’s level, following an implied net injection of 84 Bcf during the report week
  • Overall U.S. natural gas consumption fell by 4% during the report week.
  • Production for the week was flat week over week. Imports from Canada were up 1% from the week before. Exports to Mexico were down 1% for the week
  • LNG exports totaled 42 Bcf
• As of September 20, 2019, the Canadian rig count was down 15 at 119 (AB – 77; BC – 9; SK – 30; MB – 3; Other – 0). Rig count for the same period last year was 226.
• US Onshore Oil rig count at September 20, 2019 is at 719, down 14 from the week prior.
  • Peak rig count was October 10, 2014 at 1,609
• Natural gas rigs drilling in the United States was down 4 at 149.
  • 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 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 67%/33%

 

Trump Watch: Iran. It’s been a tough week, that’s for sure.

Kenney Watch (new!): Buy Alberta roadshow – going well by all accounts.

Trudeau Watch (for balance): Oops. Those photos are, ahem, kinda offensive.