It’s nice to finally see a positive week for oil prices given how much doom and gloom there is overall in the energy sector what with layoffs, capital market volatility, pipeline uncertainty and banking and reserve woes. Notwithstanding the excitement $50 WTI has engendered, risk is everywhere in the energy market so rather than pop corks on the champagne bottles, I decided to pass the time catching up on some reading.

One article that caught my eye made me think back to the “Black Swan” blog last week and it had to do with a letter written by an unnamed Saudi prince calling for regime change in Saudi Arabia. The letter claims that the current leadership configuration is reckless and steering the country toward ruin. Among the issues mentioned or factors that influence this:

• A disastrous and expensive incursion against Yemen (the wealthiest country in the Gulf bombing the poorest has pretty lousy optics)
• The series of fatal mishaps in Mecca including the collapsed crane and a deadly stampede where at least 700 people died (a majority of whom were Iranian) which have shaken the perception of the Saudi royal family’s responsible stewardship of the holiest site in the Islamic world
• The harsh economic impacts of the low price of oil and the Saudi strategy of keeping prices low that is leading to an expanding budgetary deficit (estimated at some $100 billion)
• An increasing level of social unease in a country where many people are seeing their standard of living erode as costs on everything increase (which was a major precursor to the “Arab Spring”)
• The increasing belligerence of a newly empowered Iran toward Saudi Arabia by proxy through its involvement in supporting Assad in Syria and other anti-Saudi parties as well as overt statements directly against Saudi Arabia by senior leadership
• The accelerating collapse of U.S. influence in the Middle East (don’t kid yourself, this is very real) and the rise of Russian influence

While political intrigue and rumour is nothing new to the Saudi royal family (of the Middle East for that matter), this type of public dissent “within the ranks” is unheard of and hasn’t happened since the 1960’s when a palace coup led to King Saud being replaced by King Faisl.

The suggestion here is not that some kind of violent political upheaval in Saudi Arabia is going to happen in some imminent way, rather that the seeds are there and that the warning signs are flashing red. Given the importance of Saudi Arabia to global petroleum markets, it would be unwise not to pay attention. We should be very worried about what may be happening in Saudi Arabia.

Prices as at October 9, 2015 (October 2, 2015)

• The price of oil rallied significantly during the week primarily based on demand factors.
  • Storage posted a surprise increase
  • Production grew marginally
  • Markets reacted positively to some demand fundamentals
  • The rig count decreased again
• Natural gas gained gorund during the week in anticipation of increased demand in winter

• WTI Crude: $49.65 ($45.64)
• Nymex Gas: $2.519 ($2.465)
• US/Canadian Dollar: $0.7719 ($ 0.7596)

Highlights

• As at October 2, 2015, US crude oil supplies were at 461.0 million barrels, a increase of 3.1 million barrels from the previous week and 99.3 million barrels ahead of last year. Much of the increase was the result of increased imports.
• The number of days oil supply in storage was 28.7, ahead of last year’s 22.7.
• Production increased marginally to 9.172 million barrels per day from 9.096 with lower 48 and Alaska production splitting the increase equally. Production last year at the same time was 8.854 million barrels per day.
• As at October 2, 2015, US natural gas in storage was 3,633 billion cubic feet (Bcf), which is 4% above the 5-year average and about 14% higher than last year’s level, following an implied net injection of 95 Bcf during the report week.
• Overall U.S. natural gas consumption increased by 1.9% this week with a power consumption decline of 10.8% being offset by a residential and commercial increase of 28%
• Oil rig count at October 9 was down to 609 from 614 the week prior.
• Natural gas rigs drilling in the United States are down to 189 from 195.
• As of October 5, the Canadian rig count was up marginally to 172 (23% utilization), 110 Alberta (21%), 32 BC (39%), 28 Saskatchewan (22%), 2 Manitoba (11%)). Utilization for the same week last year was 50%.

Drillbits

• Suncor announced an unsolicited takeover offer of Syncrude partner Canadian Oil Sands valued at C$4.3 billion. While shares of Canadian Oil Sands surged on the announcement, it is unlikely the opportunistic bid will succeed as consensus is that it significantly undervalues the Canadian Oil Sands interest. Canadian Oil Sands rejected the bid and adopted a poison pill defence
• Encana announced the sale of its Colorado DJ Basin assets to an investment group led by the Canada Pension Plan Investment Board for US$900 million, continuing Encana’s strategy of divesting non-core (formerly core) assets to raise cash and a continuation of the CPPIB’s multi-billion dollar energy shopping spree.
• Canada Election Watch
  • All the parties are doing their best to out-outrage each other.
  • The NDP is losing support and the Liberals are gaining.
  • Conservative support is steady
  • Fearless prediction coming next week!
• Drumpf Watch – The Donald spent part of the week praising The Putin for his bold actions in Syria, seemingly oblivious to the foreign policy issues associated with Russian belligerence.