Every once in a while, I am struck by events or occurrences around me and struggle to figure out what is really happening. As an example, in the energy industry, news comes at you fast and furious and from all angles. It’s like chaos theory – it’s all non-linear and causation is often difficult if not impossible to find no matter how much you think you squashed that butterfly under your heel.

 

On the other hand, there is a much simpler analogy to use as opposed to the tortured Butterfly Effect. This is one I like to call the Halloween Effect, where many times things are not what they appear to be, things are spooky or not spooky, the apparition on your doorstep that you thought was the neighbour’s kid is in fact not and things show up that you have never heard of, but everyone else seems to get.

 

For example, one of my daughters is dressing as something called “Bendy” for Halloween. What’s a Bendy? I don’t know. It’s from Bendy and the Ink Machine. I thought it was a band. Turns out no. It’s apparently is an online horror video game.  Which all the cool kids know. Which I obviously don’t.

 

I don’t know whether Bendy is spooky or scary or not, but it’s a reminder to me that I don’t know everything about everything and that while something seems one way (a band) it may actually be another (an online horror game).

 

In that vein, I thought it would be worth exploring a couple of recent happenings to challenge the “on the surface interpretation” we apply all too often and maybe have some fun with some and see if we can’t shoe-horn them into some tortured Halloween metaphors. If that fails, we can just collectively decide if they are spooky or not.

 

EIA Reports – A Mystery wrapped in a spooky enigma…

 

So, a couple of analysts I follow do interesting work on inventories and spend considerable effort trying to identify trends both long and short term. One idea I find interesting is the idea of what they call comparative inventories – basically the current run rate of commodity inventory plotted against some reference level (typically the five year average) and, of course, prices in order to discern any patterns.

 

What this analysis is consistently showing is that comparative inventories of both oil and natural gas have been falling over the last year but the price response, for whatever reason, hasn’t been there.

 

Let’s take this past week for example. On Wednesday the EIA reported a fairly thin add to inventories, a high export number and a high import number. There was also a very high draw of finished products and refinery runs were back to pre-Harvey levels. Price response was… tepid. Which is possibly an understatement.

 

But scratch below the surface and what do we see? Actual US exports draining actual inventories. Imports filling the recovering refinery runs and finished product demand is high.

 

Factor in slowing production growth and a comparative inventory that is only 80 million ahead of the five year average and we should see some positive price movement – right? Last time comparative inventories were this low? January 2015. Prices were about the same but at that time inventory and storage was moving in the exact opposite direction because there had been twice as many rigs working for at least the prior 12 months and money was no object.

 

On the gas side, the EIA storage report came out yesterday and showed a 64 bcf add, so we keep seeing incremental storage adds (which of course we always do up to November when heating season starts). And the price didn’t move at all – might have fallen. But what’s behind the numbers? Well relative to the five year average the “comparative inventory” was 75 bcf. So we were that much ahead of the five year average. Spooky, right? But, context please… Last year at this time we were also at a CI of 75 bcf, but the price was $3.40/Mcf as opposed to this year where we are at $2.70. What’s up with that!?!? Also of note, the Comparative Inventory has declined more than 300 BCF since April 2017. Why does that matter? Because that is injection season – so if supply was so ridiculously plentiful, wouldn’t that number be expanding?

 

So, two boring old bulls wandering around dressed as bears. Go figure.

 

Venezuela

 

I think we can say that at this point in time, Venezuela is pretty much a failed state. The economy, if you can call it that, is an unmitigated disaster and the government clings to power because they are all afraid that the starving masses might string them all up. Oil exports are plunging due to chronic mismanagement, poor quality, lack of funds, corruption, US sanctions and massive incompetence. PDVSA, the state oil company has bond payments of $1.0 billion due today and $1.2 billion early next week and, as far as most anyone knows, not very much money. Missing these payments would be an event of default and since they are government owned, a government default. Consensus is that the payment will somehow be made but at what cost? The noose continues to get tighter and tighter. Meanwhile, the “government” continues to cozy up with Russia for financial support. This won’t end well. If you were a trick or treater, this is the house you don’t go to. Spooky.

 

Middle East Tensions Revisited

 

Fresh off their referendum on independence, the Iraqi Kurds found themselves invaded by Iraqi forces, gave up the Kirkuk oilfields they so desperately wanted and suddenly determined that negotiation might not be such a bad idea after all.

 

Meanwhile, OPEC and Saudi made statements regarding extending the production quota agreement until the end of 2018. Hmm. It is interesting that these statements are coming out now, a full month in advance of the semi-annual meeting. When you combine that with recent Saudi investment announcements, the confirmation of the Aramco IPO and Russian confirmation that they would like to see the agreement extended. All around a pretty unspooky development, but…, with Russia is involved, it’s every bit as likely to be a trick, in treat’s costume. Spooky.

 

Last observation before I get to the meat…

 

Today the Catalan government declared its independence from Spain and Spain said no you can’t do that. What’s next? Well there are massive demonstrations everywhere and this isn’t going to end well. Look, I’m sure I’m not the first one to say or think this, but Europe – get your sh** together. You’ve had thousands of years to settle these things. Spain – your Francisco Franco costume is way out of date. You are definitely spooky. You get a rock.

 

The UCP Leadership Race or the Three Amigos

 

This is totally local, but we have a provincial party leadership election under way right now, results to come this weekend so I feel duty bound to share some thoughts on the leadership race for the United Conservative Party.

 

First off, this race is spooky.

 

Also, this is an important vote here in Alberta as many are convinced that the winner of this leadership race is a shoo-in to defeat the evil red-horde of Notley Communists and Oil-Haters and restore the natural governing party to power here in Alberta. To this I would say, not so fast. There is always the other side to the political argument and that is that this is the battle for the progressive heart and soul of the province and that a bunch of old white guys are choosing which regressive social luddite will be the sacrificial lamb to the progressive juggernaut that is the urban NDP, led by its fearless champion Rachel Notley.

 

Phew. Quite the responsibility. And I can say is it’s one that UCP members need to take seriously. But remember, it’s electronic voting, they have a copy of your driver’s licence or other government ID. So vote “carefully” – someone may be watching.

 

For those of you not in Alberta, and some here for fun, Anyway, I am calling the three candidates the Three Amigos. Why? Because I could have called them something else, but that would have been insulting. The Three Amigos, for those of you not as ancient as I, was a spectacularly awful movie starring Steve Martin, Martin Short and Chevy Chase dressed as stereotypical Mexican caballeros or something. So the main reason I chose that movie is how ridiculous each of the candidates would look in the costume.

Anyway, down to business

The Three Amigos in this instance are

• Brian Jean, current MLA, former Wildrose party leader and Conservative MP from Fort Mac;
• Jason Kenney, longtime Conservative MP from Calgary Midnapore (my riding), Cabinet Minister, former Leader of the Alberta PC party and The Hardest Working Man in Politics ^TM; and,
• Doug Schweitzer – a Calgary lawyer, campaign organizer and relative unknown.

Jason Kenney is a career politician and the most impassioned and informed of the candidates. He is also the hardest working guy in politics (^TM) and has an enviable track record of getting things done federally in a minority and majority government. Fiscally he appears to check all the boxes, but he is also pretty polarizing on the social side, engenders trust issues with women (according to my unscientific survey) and his minions are reputed to be pure evil.

 

Brian Jean projects as a good guy who has put in his time and has plenty of experience in government. His legacy party memory with the electorate is, unfortunately, the infamous lake of fire. He did however bring the party back from oblivion in the last election, although that vote split let the NDP get in so… It appears often that he maybe lacks the sophistication and grasp of policy that Kenney has but maybe that will work for him.

 

Doug Schweitzer is, I am told, an “earnest young man”, some of his ideas are good, some are pretty bad (min wage roll-back for example). That said, good or bad, he is willing to roll the dice with policy ideas. He is also the only candidate who has come out and declared as a socially progressive. More than the other, he probably represents what many would call the proto-typical “conservative” party member – young, bright, articulate, filled with fiscally conservative ideas and energy and socially progressive to boot – ideally situated to win the hearts and minds of an electorate wandering in the wilderness looking for a hope.

 

Hopes against the NDP

 

Of the three, although it would seem a slam dunk for anyone, Jason Kenney probably has the best chance to beat Rachel Notley. He works the hardest (^TM) and he will get the right side support. Provided he doesn’t fall apart socially (events of the last week notwithstanding) can probably draw a large enough share of the progressive/center with the rest vote splitting between the NDP, the Liberals and the NDP.

Brian Jean would get the Wild Rose cohort, but not sure how he plays in urban areas which are much more solidly progressive than I think the more rural support base thinks it is.

As the relative unknown, Doug Schweitzer would have the opportunity to set out a blank canvas and could use his social progressiveness to woo back some of the centre without too much alienation of the harder right conservative and former Wild Rose supporters because they are just so darned angry at Notley.

 

When it comes down to the head to head battle against the forces of evil, in a leadership debate against Rachel Notley, I give the edge to Jason Kenney because he will prepare harder^TM than anyone and isn’t inclined to put his foot in his mouth like some of the others (that’s Brian Jean by the way). An experienced politician with four years of legislature under her belt, it is likely that Notley would eat the neophyte Schweitzer for breakfast in a debate, even if he is a lawyer, because the arguments are emotional, not technical.

 

So, who will win?

 

The Kenney machine is unrivalled in Alberta politics. He has more grassroots support than anyone thinks and as stated above, he just works harder(^TM). And truth told? It seems he wants it more. If he’d moderate/clarify his stance on gay-straight alliances in schools and lose some of the “he’s hiding something on religion” vibe, he’d be premier in a heartbeat. Brian Jean appears to be softer around the edges but if the UCP wants to win big, he’s not the guy.

 

My call? Kenney wins. Bigly. Jean second and Schweitzer a competitive third Spooky?

 

How does the vote unfold?

 

It’s the $50,000 question and it’s actually important for 2019. Since I think Kenney is a lock to win, I am interested in the strategic implications of how the votes split. If you assume the original split was 50/50 between Jean and Kenney, the votes to watch will be how much that split changes and how many votes turn to Doug Schweitzer. The more votes Kenney gets the stronger the mandate to lead he has, so if the members want that to be decisive it will be reflected in the relative split between Jean and Kenney – anything over 75% is massive. But watch the vote tallies for Schweitzer. He represents the moderating influence of the progressive side and I am convinced that if the UCP wants to lock down the next provincial election, they need to reclaim the centre from the NDP, Liberals and the upstart Alberta Party. I think a robust support for Schweitzer is actually a progressive vote and the hard working (^TM) Kenney can read results as well as anyone, so that support will inform policy for the UCP going forward. Anything more than 10% and it gets noticed, if his vote total challenges whoever finishes second, that is huge.

 

Should be an interesting and spooky weekend.

 

Prices as at October 27, 2017 (October 20, 2017)

• The price of oil fell during the week before rallying at the end of the week due to a bit of geopolitical risk
  • Storage posted a small increase
  • Production recovered from hurricane outages
  • The rig count in the US was flat
• Natural gas fell during the week

 

• WTI Crude: $53.98 ($51.47)
• Nymex Gas: $2.752 ($2.900)
• US/Canadian Dollar: $0.7798 ($ 0.7925)

Highlights

• As at October 20, 2017, US crude oil supplies were at 457.3 million barrels, a increase of 0.8 million barrels from the previous week and 10.9 million barrels below last year.
  • The number of days oil supply in storage was 28.7 behind last year’s 30.0.
  • Production was up for the week by 1,101,000 barrels a day at 9.507 million barrels per day. Production last year at the same time was 8.504 million barrels per day. The change in production this week came from an increase in Alaska deliveries and dramatically recovered Lower 48 production due to hurricane related shut-ins.
  • Imports fell from 7.483 million barrels a day to 8.123 compared to 7.106 million barrels per day last year.
  • Exports from the US rose to 1.924 million barrels a day from 1.780 and 0.415 a year ago
  • Canadian exports to the US were 3.017 million barrels a day, down from 3.265
  • Refinery inputs were down during the week at 16.025 million barrels a day
• As at October 20, 2017, US natural gas in storage was 3.710 billion cubic feet (Bcf), which is 1% lower than the 5-year average and about 5% less than last year’s level, following an implied net injection of 64 Bcf during the report week.
  • Overall U.S. natural gas consumption was down 1% during the week, shared across all sectors
  • Production for the week was up 1%. Imports from Canada were up  2% compared to the week before. Exports to Mexico were down 1%.
  • LNG exports totalled 21.4 Bcf.
• As of October 23 the Canadian rig count was 197, 145 Alberta, 23 BC, 26 Saskatchewan, 3 Manitoba. Rig count for the same period last year was 160.
• US Onshore Oil rig count at October 27 was at 737, 1 more than the week prior.
  • Peak rig count was October 10, 2014 at 1,609
• Natural gas rigs drilling in the United States was down 5 at 172.
  • 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 unchanged at 20
  • 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%

Drillbits

• The Trump administration announced its intention to release the largest amount of federal leases available in history.
• The National Energy Board says Canadian demand for fossil fuels will peak in tow years and then flat line. Way to take one for the team
• A construction decision on a small-scale liquefied natural (LNG) gas export terminal on British Columbia’s coast has been pushed back to 2018, as Woodfibre LNG Ltd works to make its C$1.6 billion ($1.3 billion) project competitive in the face of weak prices.
• Trump Watch: The budget passed.