Crude Observations

Something, something, numbers

The other day I was looking back at some of my old blogs looking for a little inspiration and I was struck by how in the before times I spent a lot of blog space looking at numbers (not only for ordering lists) and industry statistics and making pithy or wise commentary out of those numbers. These numbers included production numbers, prices and other meaningful stats that would tickle my fancy during the week and that I felt were somehow worthy of further reflection.


Yet somewhere along the way, I got away from that for some as yet unexplained reason. The last time I included the numbers was, in fact, about a year ago. I was reminded about some of these numbers when I was looking at Tesla’s Q1 earnings report which should something along the lines of a $450-$500 million profit for the quarter, which is a great right? Well done Tesla. Except of course the number is a lie. They made $100 million off their weird Bitcoin foray and received government transfers of about $400 million which of course means that without these two items they lost money. Making cars. Which is their business.


This got me thinking of course about other numbers and how some of them can lie, some can be interpreted or some of the them are just plain lies that would satisfy only economists. I’m not going to go through some big exercize of talking about good and bad numbers or revealing the evil mistruths and Illuminati coded messages sent via numbers like some crazy Q dude. Nor am I going to try to sell you any cryptocurrency that promises a 13,000% return (yet) or hawk a NFT of my latest blog for bazillions of dollars.


No, I’m just going to take a look at some numbers that have caught my attention recently.


The first thing I am going to look at is earnings reports because, well, here in Western Canada we have seen some whoppers in the last week, especially compared to the same time last year (honestly not sure the utility of those comparisons, but that is how we do things).


At any rate, over the last week, some of Canada’s premiere energy firms reported their Q1 numbers, just like Tesla.


Interestingly, Suncor ($831 million), CNRL ($1.38 Billion), Tourmaline ($248 million), Arc Resources (proforma $574 FFO), Imperial Oil ($392 million), Cenovus ($228 million), and even Ovintiv (you’ll always be EnCana to me) at $309 million all delivered substantial net earnings and cash flow without the use of gimmicks, doodads, fake crypto and celebrity CEO variety show appearances.


And what was their reward?


At close of business today they had, combined, close to $3 billion in profit, 8 times what Tesla “earned”.


And the market rewards them with a combined market cap of $163 billion or about a quarter of Tesla’s $639 billion.


The math here is broken.


Speaking of broken math, anyone notice the price of everything is going up? Gas, food, lodging. Everything is more expensive. Now I don’t know if it’s supply chain based, scarcity or anticipatory, but inflation is a reality.


And coming out of a pandemic, with economies so fragile, no central banker in their right mind wants to be the one to tap the brakes. Janet Yellen mentioned raising rates earlier this week and the markets lost their lunch. So instead of rational central banking we get a perpetuation of the asset bubble. The result? Food prices are up 10%. Gas prices are up 10% or more. Housing prices are surging year over year. The spot price of lumber looks like bitcoin. Chip scarcity means that soon the price of anything that uses a chip will have to increase, starting with cars and electronics. Meanwhile headline inflation is “in range”. And interest rates are at historic lows. The yield on the 10 year US treasury is currently at about 1.6%, up off historic lows but not by much. Certainly not reflective of what is happening in the real world. Something is broken.


You know what’s not broken?


The price of oil. It’s been great. How do I know that? Well aside from the results posted by all those lousy Canadian oil and gas companies, at $64.89, the price is in a sweet spot. It is higher than my forecast (yay) but low enough that all the crazies in the Permian don’t go rushing back to work.


Let’s take a look at the stats I used to obsess over (and probably still should) and compare them to this time last year (in brackets).


  • WTI Crude: $64.89 ($26.10)
  • Western Canada Select: $52.35 ($20.98)
  • AECO Spot: $2.749 ($1.891)
  • NYMEX Gas: $2.986 ($1.746)
  • US/Canadian Dollar: $0.82 ($0.72)


Holy moly. I haven’t looked at those numbers in that context in a long time. But by any objective measure, this is a market that is materially improved from a year ago and really, cause for celebration (are you listening Jason?).


Sure, you could quibble that the dollar has strengthened too much, but in all reality this is about as bullish a picture we have seen for the energy sector in Canada for years. And I’m not even slightly exaggerating. Which makes me wonder where all the constant doom and gloom is coming from.


Maybe it’s on the production and supply side. People are always worried about that.


Let’s take a look.


As at May 1, 2021, US crude oil supplies were at 485.1 million barrels, a decrease from the previous week and well below the 532.2 million barrels they were at last year at this time. This puts the US 30 million barrels away from erasing the pandemic surplus. For perspective, that’s 2 days of refinery runs.


Production was 10.900 million barrels per day. Production last year at the same time was 11.900 million barrels per day.


Refinery inputs are at 15.293 million barrels per day compared to 12.976 million barrels per day this time last year.


Even the gas picture looks pretty good


As at May 1, 2021, US natural gas in storage was 1,958 billion cubic feet (Bcf), which is 3% below the 5-year average and about 15% lower than last year’s level of 2,319 Bcf. Production was pretty much flat with the prior year – demand never collapsed as much for gas so activity levels stayed relatively stable.


How about oil drilling activity levels? Surely they will overwhelm the market at these prices?


As of May 8, 2021, the Canadian rig count was 55. Seems low, right? Except this is breakup. Last year at this time it was 26. Ouch. Same time in 2019 it was 58.


US Onshore Oil rig count at May 8, 2020 was at 292, this year it has recovered significantly and is at 342, which seems like a lot, but…


Peak rig count was October 10, 2014 at 1,609 and just as recently as May 2019 it was at 831.


The implications of this are clear – there are not enough rigs currently drilling to significantly increase production in the short to medium term


Looking at another number is interesting as well. Everyone likes to talk about DUCs, but not the ones you eat, shoot, breed. No, these DUCs are drilled but uncompleted wells or untapped production. And with the frantic drilling of the free-for all days, there was a massive overhang of these.


At this time (latest data is end of March), there are about 7,000 DUCs, with about 1,000 of them natural gas wells. Last year, there were 7,600 but only 500 of them were natural gas wells. This means that for oily purposes, there are 1,100 fewer DUCs meaning the excess inventory has been worked through, which makes sense with drilling down so drastically. Want another data point? In May 2019, the number of DUCs that were oily was just under 8,000. Wow. Still a lot of excess, right? Maybe not.


First off, there is typically a base level of DUCs at any given time – dry holes, inventory, secondary property, child wells, whatever.


Secondly, you need the crews to actually go out and do all the work and that world has also changed.


So who is completing these wells anyway? That is an excellent question. A lot less people. To think about this, you need to look at the number of frac spreads – the crews that are out these completing all these DUCs and bringing them online.


At April 30, 2021 there were 217 Frac Spreads working. Seems like a lot, right? Wrong. While at the same time last year, there were only 55 working (something about a pandemic I think), in the first week of May 2019, there were 384 crews out completing wells.


So half the rigs working, half the frac crews working and a dwindling inventory of wells to bring online.


Where am I going with this? Activity levels in the US have recovered, but they are nowhere near enough to significantly expand US light tight oil production in the short to medium term. Looks like our price deck is pretty safe.


But what about demand you say? Good question. As you can tell by the refinery runs still being a couple of million barrels per day below pre-pandemic levels, US demand hasn’t completely recovered and so much is dependent on what happens with the reopenings.


Interestingly, there are some numbers, and qualitative considerations that have popped up in the past week. One of which is what actually inspired this theme.


First off, the draws in US fuel and gas inventories have been enormous the last few weeks. This means that not only is shipping picking up with economic activity but that Joe Bag’o’Donuts is hopping in his SUV for interstate travel. And this is before the traditional summer driving season starts after Memorial Day.


In 2020, vehicle miles travelled per day in the United States was about 7.7 billion. In 2021 that number is expected to be 8.4 billion and 8.8 billion in 2022, which is equivalent to 2019. This means that by the end of 2021, fuel demand in the US should have basically recovered to pre-pandemic levels.


If Canada can get its act together, can we be that much behind?


Another number I saw was 30%. That is the expectation for the increase in jet fuel demand quarter over quarter in the United States as pent-up demand for vacations, weddings, visiting mom and the effect of vaccinations and reopenings turbocharge the domestic travel industry. By Q3, jet fuel demand is expected to hit 1.47 million barrels per day, 50% higher than a year earlier.


Another number that has been on my mind lately has been 12. As in May 12. That is the day that Michigan Governor Gretchen Whitmer has set for the shutdown of the Line 5 pipeline crossing of the Straits of Mackinac. While I give that a close to 0% chance of actually happening, it is good that this environmental showboating is getting attention at the highest levels of the Federal Government. Line 5 is a critical part of the living, breathing North American energy cardio-vascular system and shutting it even temporarily will only serve to further exacerbate the delicate balance between energy prices and security and inflation.


The cross-border oil trade between Canada and the United States is about $100 billion a year and 5.5 million barrels of oil a day (each way). Line 5 moves about 10% of that and supplies close to half of Michgan’s propane needs and 40% of Ontario’s fuel.


There is a solution that has been agreed to between the state and Enbridge. It’s a new crossing. The governor refuses to honour that because Enbridge doesn’t want to rush the build. The governor needs to stop grandstanding and trying to polish her reputation for a presidential run because at this rate, she may not even win reelection in her own state if she causes an energy crisis.


Regardless of all that, demand for oil, gas and energy is in full recovery, the numbers bear it out.


This is extremely bullish for Canada and also for Alberta.


Now if only we could get some of these numbers acknowledged in the markets, my portfolio would be much happier.

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