So as I sit here, anxiously awaiting the results of two defining boondoggles to see if our world is going to collapse around us or if we can finally see a sliver of a silver lining up ahead, I’m tempted, as always, to summarize some thoughts that have been flying around in various forms in the last few posts. I often say the “oilpatch isn’t going anywhere soon” which I truly believe, but there is some method to that statement.

Not going anywhere, but fighting headwinds…

For example, here in Alberta, we seem to have a tin-eared provincial government intent on imposing its agenda at all costs (after all why wouldn’t they? They are by most accounts only a one-term wonder so they have to rush all the changes through as quickly as possible) compounded by a new federal government that is just getting its feet underneath it and does not appear to have a strong knowledge base about the resource industry and doesn’t actually appear to care that much. Collectively, this means carbon taxes, increases in corporate taxes, royalty regime reviews and delays in crtitical infrastructure.

Our one primary market (the U.S.) for our product doesn’t appear to like us very much, refusing pipelines and calling us “dirty”.

The energy market overall is in the doldrums. $40 oil, lower for longer. $2 natural gas – basically free.

And our fate seems to be in the hands of people we don’t understand, speaking a language we don’t get. So we hang on every word, parse every sentence and trade every incomprehensible press release.

OPEC is meeting today and the likely result will be… wait for it… Kaboom! (see above).

It seems as if we are destined to drift forever, and it’s easy when things are directionless to think that the road has no end and it is human nature to be massively discouraged. But for every headwind, there are also unassailable facts or mitigating factors.

• The world is going to need 7 million barrels of new oil production in the next several years considering global demand growth and decline rates of existing production
• Every major oil producer from OPEC down continues to produce flat-out to protect market share with the main exception of Iran
• Iran’s capacity to add the marginal barrel is (generously) estimated to be about 1 million barrels a day over the next few years
• More than $100 billion in capex has been shuttered in the last year and it is expected that 2016 will see a further round of cuts
• The credit cycle continues to work against producers, making capital more expensive and less available when it will be needed
• The ability to add the marginal barrel after Iran is going to be a major problem
• On the natural gas side, every carbon reduction strategy proposed involves a transition of some kind from coal-fired electricity to natural gas – less emissions, cleaner burning, abundantly available – but not yet under production.
• This gas has to come from somewhere
• Absent domestic production, it gets shipped as LNG. Many people seem to think that LNG projects exist only to leverage a price differential between a domestic and overseas market, but that is shortsighted – the proponents of these projects are major multinational companies and NOC’s  who can read the tea leaves with the best of them – they know the long term secular trend favours gas and securing supply is critical. North America is flush with gas.
• Flows of funds in futures markets are still bearish, but hedge funds are starting to buy
• Geopolitical tensions are increasing, and the market is starting to react to them
  • The proxy war in Yemen between Saudi Arabia and Iran
  • Sabre rattling between Turney and Russia
  • The persistency of ISIS/ISIL/Daesch – the caliphate that won’t go away
  • Twitchiness regarding domestic terrrorism in Europe and, increasingly, North America
  • Chinese expansionism

Of course none of this helps in the short term, because what is happening in the here and now in the patch hurts on an individual and corporate level, but if you believe in the above and sort through the fog and the BS surrounding the oil patch, the opportunity is there.

The turn in the market, when it comes, is going to be sharper and more rapid than I think a lot of people expect and the smart money and management teams are already positioning to take advantage of the opportunity presented to them by both an anticipated turnaround and the bevy of new environmental rules that are being imposed.

And that opportunity is there for the emerging, efficient producer. It is there for the company that figures out how to develop that marginal barrel cheaper and cleaner than the last. It is there for the service company that develops the newest technology to manage water usage or drill more efficiently. And on the green side, it is also there for the company that is able to deliver more renewable energy cheaper and with less subsidy than the last guy. After all, the holy grail of civilization is cheap energy – in whatever form!

In Canada, and in Alberta in particular, the next six months are going to be a time of great transition and massive opportunity.

For operators, even a 25% to 50% utilization winter will help restore some positive feelings – wheels will turn, people will get paid, some form of normalcy returns to the market.

For capital sources, this is a generational buying opportunity as the confluence of market downturn and timing will allow smart money to aggregate the winners that will be the dominant players in the next one or two decades. Think of it as the U.S. real estate market opportunity of 2009-2010 across a global industry.

Lastly, for government (yes, even they get something out of it), the opportunity is there for the one with the foresight to allow economy altering infrastructure to be built and exploited to generate the cheap energy and wealth we need to create prosperity for future generations.

But right now, I’m waiting on OPEC.

Prices as at December 4, 2015 (November 27, 2015)

• The price of oil ended the week marginally up, after a strong midweek rally.
  • Storage posted a smaller than expected increase
  • Production was up marginally
  • Markets are selling the storage story
  • The rig count decreased
  • OPEC
• Natural gas lost ground during the week as production declines continue to be offset by a persistently warm fall.

• WTI Crude: $40.08 ($41.77)
• Nymex Gas: $2.179 ($2.227)
• US/Canadian Dollar: $0.7479 ($ 0.7483)

Highlights

• As at November 27, 2015, US crude oil supplies were at 489.4 million barrels, an increase of 1.2 million barrels from the previous week and 110.1 million barrels ahead of last year. An large increase in imports contributed to the inventory build.
• The number of days oil supply in storage was 30.0, ahead of last year’s 23.7.
• Production was up to 9.202 million barrels per day. Production last year at the same time was 9,057 million barrels per day. Based on the numbers, it is likely that by end of December year over year production growth in the U.S. will be negative. The marginal increase in production this week came from lower 48.
• As at November 27, 2015, US natural gas in storage was 3,956 billion cubic feet (Bcf), which is 7% above the 5-year average and about 16% higher than last year’s level, following an implied net withdrawal of 53 Bcf during the report week marking the start of the winter drawdown.
• Overall U.S. natural gas consumption increased by 1.8% for the period led by power sector demand
• Oil rig count at November 25 was down to 545 from 555 the week prior.
• Natural gas rigs drilling in the United States were up to 192 from 189.
• As of November 30, the Canadian rig count was at 179 (23% utilization), 113 Alberta (21%), 31 BC (37%), 32 Saskatchewan (25%), 3 Manitoba (17%)). Utilization for the same week last year was 49%.
• US split of Oil vs Gas rigs is 75%/25%, in Canada the split is 44%/56%

Drillbits

• Aside from OPEC meeting and COP21, a pretty slow news week
• Canadian Oilsands was granted an extension of the time required for a response to Suncor’s unsolicited offer to pruchase of 1 month. COS shareholders now have until January 4, 2016 to respond or find an alternative offer. Suncor agreed to extend their offer.
• Enbridge’s Line B reversal began this week, expected to deliver 300,000 barrels a day of oil to eastern refineries. Ironically this includes Bakken Crude crossing the Canadian border, something we apparently have no problem with even though flaring from the Bakken generates about 10% of the carbon emissions the oilsands as a whole do – and that’s just burning off gas with no other purpose. Just saying…
• Drumpf Watch – Best Drumpf thing I saw this week:
  • Drumpf’s wealth has been estimated at $2.7 billion – impressive
  • If he had invested the money left him by his father in S&P indexed funds, his net worth would be…
  • …$8 billion
  • Terrific
  • On another note, in a speech to the Republican Jewish Coalition, Drumpf questioned Israel’s commitment to the MidEast peace process, refused to endorse Jerusalem as the undivided capital of Israel and made disparaging stereotype comments.
  • Still, his poll numbers stay high although it should be noted, a lot of his poll support is from Republican leaning indpependents, not necessarily primary participants.

On an unrelated note – Happy birthday to my beautiful wife! (This is how I make sure people read to the end!)