So I guess that is that. OPEC had their big semi-annual meeting, replete with hype and intrigue, rumours of a re-established quota or some other form of market-friendly supply management initiative, all proposed and backed by none other than a suddenly receptive Saudi Arabia. Woot!

Except, as expected, the meeting ended with the fine folks of OPEC saying “it’s all good, nothing to see here. Perfectly happy with the self-correcting market. $50 oil is OK for now.”

In fact, the new Saudi oil minister even went so far as to declare that he liked shale, didn’t have a problem with it, as long as there isn’t too much of course.

So hopefully that parks that for the time being, time to move on to other matters.

As I find myself on a short vacation currently (and I forgot my charger so am conserving battery power), I am going to confine myself to some minor updates or things I have noted this week that may grow up to be more important. Maybe.

Big Run on Natural Gas Prices

The price of natural gas had quite the move this past week and a bit, registering gains approaching 20% as expected hot weather in North America has pushed up demand for electricity and air conditioning. I suppose the question is whether these prices are sustainable and what is the ceiling.

To which I tentatively say, yes and maybe higher than we think.

Given the forecast for a hotter summer, it is expected that demand for gas for electricity generation will be higher this summer compared to prior years and the switching of generation away from coal will exacerbate this demand. This supported by the EIA that expects a higher percentage of electricity to be generated by gas vs coal for the whole year.

Looking at near term natural gas production numbers in the United States one can see that while production is up year over year, it is actually declining month over month in all the major plays.

This isn’t surprising since the majority of US shale gas drilling is uneconomic at prices much less than $4, never mind $2 an Mcf.

So with shale investment drying up and with conventional dry gas production in terminal decline, the prospect of a significant rebound in drilling and additions to production are remote in the near term which should help to prop up prices until the end of injection season.

Other contributing factors include the reduction of associated gas production in tight oil plays with the cutbacks there, an overall reduction in the rig count in the larger shale basins and the increase in exports to Mexico via pipeline and elsewhere via LNG.

Bullish, no?

Another Pipeline Gets Approved – Alberta Mid and Downstream Activity to Pace the Eventual Recovery

The NEB approved another pipeline, this one a lateral and extension of the Nova Gas Transmission line which transports natural gas around the province of Alberta. The 270 km project is expected to be finished in late 2017.

In other pipeline news, the McKenzie Valley Pipeline project (yes that one) was granted an extension by the NEB until 2022.
The boom in midstream and downstream transmission, gathering and distribution continues in Alberta, defying the downturn and the projections of many analysts.

Chart of the week

The chart on the right shows the decline rates for conventional non-OPEC production in millions of barrels per day. As can be seen the decline rate has bveen increasing and with the lack of investment, this is expected to remain high. Put another way, the world needs to replace 6 million barrels a day of productuon where only a few years ago that number was one third that amount. As we have been trying to reinforce on a regualr basis, supply is getting tighter and it’s not only about US tight oil.

The spidey senses are tingling

While not wanting to be the type of person who engages in useless conjecture and speculation, I’m going to anyway. Following tight on the heels of the very public Whitecap Resources capex expansion announcement, a number of E&P companies have quietly brought some projects forward that were projected to start later in the year. It is likely that the combination of significantly reduced service rates and a rallying commodity price have eased the purse-strings.

Bold Prediction: This is the beginning of a trend. A slowly evolving trend, but a trend nonetheless.

Contest Update: It would appear we have a consensus winner – Crude Observations… courtesy of Doug D, formerly of NDG, Montreal, Quebec, currently residing (I believe) in upstate New York (insert Unabomber joke here). Rebranding to occur shortly, as when I get back from vacation and a spiffy masthead design miraculously appears. Evidence of whiskey to be available in next week’s blog, just because I suspect most of you didn’t believe me.

Prices as at June 3, 2016 (May 27, 2016)

• The price of oil ended the week down slightly
  • Storage posted a surprise decrease
  • Production was down again
  • The rig count was up marginally and appears to be bottoming out
  • Conitnued production declines in the US are helping keep prices up as are the production shut-ins around the world
  • Oil above $50 is not sustainable in the short term given OPEC meeting and production returns in Canada. Expect a pull-back for a period of time until the realities of the supply situation in Nigeria and Venezuela become clearer
• Natural gas rose during the week on bullish storage and weather

• WTI Crude: $48.78 ($49.50)
• Nymex Gas: $2.398 ($2.169)
• US/Canadian Dollar: $0.7737 ($ 0.7688)

Highlights

• As at May 27, 2016, US crude oil supplies were at 535.7 million barrels, a decrease of 1.4 million barrels from the previous week and 58.3 million barrels ahead of last year.
  • The number of days oil supply in storage was 32.9, ahead of last year’s 29.4.
  • Production was down again for the week at 8.735 million barrels per day. Production last year at the same time was 9.447 million barrels per day. The change in production this week came as a small increase in Alaska deliveries was offset by a large drop in lower 48 production.
  • Imports jumped from from 7.315  million barrels per day to 7.839 million barrels a day
  • Refinery inputs were down marginally during the week but strong for this time of year
  • The effect of the Fort McMurray shut downs are included in the import numbers so this decline has been offset by offloadings from other suppliers
• As at May 27, 2016, US natural gas in storage was 2,907 billion cubic feet (Bcf), which is 35% above the 5-year average and about 32% higher than last year’s level, following an implied net injection of 82 Bcf during the report week.
  • Overall U.S. natural gas consumption was steady during the week as an increase in gas for power generation was offset by a decrease in residential consumption
  • So far in 2016, average power burn has exceeded record 2015 levels by 8.6%, or 2.0 Bcf per day (Bcf/d)
• Oil rig count at June 3 was at 325, up 9 from the week prior.Before people get too wound up about a potential shale rally, I would draw attention to the bullet point below
  • Rig count at January 1, 2015 was 1,482
• Natural gas rigs drilling in the United States was down 5 at 82.
  • Rig count at January 1, 2015 was 328
• The collapse in the US rig count is likely over with most of the damage already being done
• As of May 30, with break up in full force, the Canadian rig count was at 36 (5% utilization), 27 Alberta (5%), 5 BC (7%), 4 Saskatchewan (3%), 0 Manitoba (0%)). Utilization for the same period last year was about 10%.
• US split of Oil vs Gas rigs is 80%/20%, in Canada the split is 20%/80%
  • Offshore rig count was at 21
• Offshore rig count at January 1, 2015 was 55

Drillbits

• Tourmaline has its borrowing base reaffirmed by its lending syndicate at $850 million
• Gibsons Energy closed its $330 million equity and subordinated debenture financing
• The Canadian Western Bank reported a 37% decline in Q2 profit compared to last year
• The slow return to Fort McMurray began on June 1, with the first few thousand returning to assess damage and begin the clean-up. Oilsands companies continue to restart their operations, a process that should take several weeks.
• Drumpf Watch – The Drumpf University clss action lawsuit continues to dog his presumptiveness as documents filed call to mind the movies Boiler Room and Glengary Glen Ross in their scripted, high pressure selling techiques. In addtion, the Donald put his foot in his mouth implying the judge on the suit is not American. The PGA announced on Wednesday that their tournament previously played on the Drumpf owned Doral golf course in Florida would be moving to of all places, Mexico. No word if a “wall hole” will replace the infamous island green.