**Warning – Mind Boggling Conclusion Included**

 

As we hit mid-April, we are dealing with some decidedly unseasonable weather patterns.

 

There’s Western Canada, where it’s basically been spring since February.

 

Then there’s the mid-continent and east coast of North America where the weather is decidedly less cooperative and it has been snowing and wintering off and on for the past couple of months.

 

And then of course there is Doha, Qatar, a traditionally scorching climate where pretty much everyone is hoping that it is going to be absofreakinglutely freezing on Sunday.

 

Yes indeedly-do, it is already that time, where the OPEC folks and a couple of other important non-OPEC producers are getting together to discuss the much discounted, highly anticipated and much desired “production freeze”.

 

For those not aware, the “production freeze” was an idea floated a while back for the major producers to freeze their production at current levels, ostensibly to “stop the madness” and allow demand to catch up to supply and end the glut.

 

The initial discussion of the production freeze was enough to underpin a pretty significant rally in oil prices with WTI reaching $42 a barrel. Now everyone is getting together to see of they can actually agree on anything. The whole world is watching – hopefully they don’t screw it up.

 

So what can we expect from this discussion?

OPEC is split between those who desperately want to cut production (led by Venezuela and Nigeria who are both hoping to stave off national financial collapse and anarchy), those who are willing to freeze production because they are producing at record levels anyway (Saudi Arabia, Kuwait, the UAE etc.), and the one outlier who has finally been able to start exporting significantly again, only to find out that OPEC fumbled things so badly that maybe they need to accept their also-ran status for a while longer (Iran? I’m looking at you!).

 

On the non-OPEC side, the only real player at the table is Russia (sorry Colombia).

 

Together, these producing countries and their National Oil Companies (NOCs) or state controlled energy sectors (ahem, Russia) control about 50% of global oil production, give or take. Of that amount, the Saudis and Russians (evenly split) control about half, so the rest of the participants are largely bystanders to whatever these two decide.

 

As it regards the outcome of this particular meeting, there are two primary viewpoints.

 

One argument is that since this rally is based mostly on hot air, the fear is that if these parties don’t manage to come to an agreement then prices could test the $30 level again in short order as all semblance of confidence in the market is lost.

 

The other side of the argument is that an agreement on a production freeze could send prices back up to at least $50 at which point all those crazy tight-oil fracker dudes in the United States will pile back into the market, increase production overnight and torpedo the very rally they were hoping for, possibly sending prices back to $30 and extending the downturn.

 

The reality is a bit more subtle than that, as I feel that the downside is overly pessimistic and the upside possibility overstated.

 

Keeping in mind the psychology of the oil market, where the discussion of the freeze pumped up prices because finally “someone was doing something”, it is way more important to look at the realities of the supply/demand situation around the producing world and I would argue that freeze or no freeze, the supply situation is fixing itself.

 

As noted here last week, the declines in US production are accelerating and the rest of the non-OPEC world is reporting similar declines. This on its own is enough to support prices higher than $30 and the fact that sufficient time has passed between the initial excitement about the freeze and now is allowing the “market” to digest this data.

 

On the upside scenario, this too is overstated. It is unlikely that in the new reality of compressed credit lines that many US-based drillers will be able to ramp up in the short term, particularly since a lot of equipment and manpower has disappeared. So the potential for tight oil to disrupt a rally is overblown.

My stone cold prediction? An agreement in principle by all parties (except Iran) to freeze production at current levels – I mean why not, right? Aren’t they all producing at record levels ANYWAY??????? Seriously, has anyone actually looked at spare OPEC capacity? Because there really isn’t very much. It’s Saudi Arabia then nothing. Freezing your production isn’t really a major commitment when you are producing flat out.

 

This will support another 5% to 10% rally in Brent and WTI. Enough to make people breathe easier, but still keep the rigs mostly parked for another quarter, allowing inventories to start drawing down.

 

Look, it’s a deep, deep hole. But the recovery continues.

 

Alberta Budget Update…

The NDP government in Alberta revealed their first full budget yesterday and it was a doozy and very, very red.

 

The following is the abbreviated version:

While the numbers are mind-boggling – $10 billion deficit and $58 billion in new debt through 2024, I think a little perspective is in order. There is no way the government could ever have cut costs enough to fill the hole left by $7 to $8 billion of vanishing energy related revenue or to satisfy the fiscal hawks in opposition. Deficit financing in a downturn is kind of what is expected and anyone who says there is no infrastructure deficit to be addressed in Alberta is probably recently returned from Colorado. Left with a litany of unpopular, bad choices, the NDP did what they said they would and rammed through their program – damn the torpedoes.

 

Much like the oilpatch, this is likely the very bottom. And with oil prices slowly rising (and gas – don’t forget about gas!), the numbers may actually play out better than projected.

 

As I said to a gentleman (yah that’s you Chris) I had coffee with last week, all this is really doing is setting the NDP up for re-election. Think about it, a disaster budget followed by an energy price resurgence goosing royalty revenues year over year, maybe a couple of pipelines to various coasts and in three years, a pre-election budget where the NDP will be in a position to, and no doubt will, cut taxes. .

 

All facilitated by an unseasonal freezing in Qatar, initiated a couple of months ago in part by Russia.

 

So yes, you heard it here first. Vladimir Putin is going to get Rachel Notley and the NDP re-elected in Alberta. Boom. Bob’s your uncle.

 

Prices as at April 15, 2016 (April 8, 2016)

• The price of oil ended the week up
  • Storage posted a surprise increase
  • Production was down
  • The rig count fell
  • Mixed signals about the Doha freeze meeting introduced some volatitlity
• Natural gas fell during the week on warmer weather

• WTI Crude: $40.38 ($39.54)
• Nymex Gas: $1.970 ($2.018)
• US/Canadian Dollar: $0.7781 ($ 0.7603)

 

Highlights

• As at April 8, 2016, US crude oil supplies were at 536.5 million barrels, an increase of 6.6 million barrels from the previous week and 52.8 million barrels ahead of last year. It should be noted that storage at Cushing, where WTI is priced is declining week over week, where most of the volatility in inventory is occuring is in the Gulf Coast Region where a majority of imports arrive, so in weeks where imports spike, storage spikes there as well.
  • The number of days oil supply in storage was 33.3, ahead of last year’s 30.5.
  • Production was down for the week at 8.977 million barrels per day. Production last year at the same time was 9.399 million barrels per day. The decrease in production this week came from the Lower 48.
  • Imports increased during the week
  • Refinery inputs decreased during the week
• As at April 8, 2016, US natural gas in storage was 2,477 billion cubic feet (Bcf), which is 52.1% above the 5-year average and about 62.9% higher than last year’s level, following an implied net withdrawal of 3 Bcf during the report week.
  • Overall U.S. natural gas consumption rose slightly for the week across all sectors
• Oil rig count at April 15 was down to 351 from 354 the week prior.
  • Rig count at January 1, 2015 was 1,482
• Natural gas rigs drilling in the United States was flat at 89.
  • Rig count at January 1, 2015 was 328
• As of April 11,with break up in full force, the Canadian rig count was at 42 (6% utilization), 30 Alberta (6%), 9 BC (11%), 3 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 24, down 1
  • Offshore rig count at January 1, 2015 was 55

 

Drillbits

• Earnings season is just around the corner. Results are widely expected to be worse than last quarter. That said, most market participants are now socialized to disastrous financial results so stock prices are actually holding up reasonably well
• Some time ago, I mused about which company in Western Canada is going to be the first one out of the gate to surprise with an increase in capex. Well, we have our answer.
  • The award goes to Whitecap Resources, an intermediate with operations in Saskatchewan and central Alberta, which announced on Monday it was doubling its capital budget for this year to $148 million and further reducing its dividend. The market rewarded the company, which saw its share price rise on the news before giving some of those gains back with oil prices during the week.
  • I realize not everyone agrees with me, but I like this move, particularly as it also addresses the charade that an internediate E&P company should pay dividends. Clearly management saw that the best way to increase shareholder value was to deploy capital to its business rather than distribute it as dividends. The contractors (and their families) who will be working on the 47 additional wells Whitecap will drill and complete this year say thank you.
  • I suspect we will see this emerge as a trend with well capitalized, low-cost producers
• A news report circulated this week suggesting that Justin Trudeau had been convinced by his Finance Minister and others about the importance of pipelines to Canada’s fiscal position and that he has struck a working group to figure out how to get these things built. Apart from stating the obvious solution “approve them”, this is a positive development.
• Drumpf Watch – It was a slow week of Trumping with not much happening aside from a hissy fit about primary rules in Colorado (i.e. when you don’t know the rules, you can easily lose, so the rules must be bad). Oh, and Drumpf’s kids forgot to register in time for the New York Republican Primary so they can’t vote for dad..