When I was a kid growing up in Montreal, I spent a lot of time playing around in the metro (subway) stations, in particular on the escalators.

Why? One reason was that I went to school for a time at a location that required me to take the metro, the other reason was that it was a lot of fun. Montreal’s metro system is in some spaces deep underground and the escalators are long and the space between the up and down escalator was smooth metal. So there were two games we played that were particularly fun.

The first (and scariest) was sliding down the space between the escalators and flying off on the bottom, which the “authorities” quickly caught onto and installed these clusters of spikes every 15 feet or so, making the game that much more exciting because you had to pop yourself up over these bumps as you slid down lest you become mortally wounded and a complete train wreck.

The second game was running up (or down) the opposite direction escalator, sometimes racing a friend using the correct one, sometimes trying to reach the top before anyone got on, sometimes dodging through the people who were riding the escalator. This game was less scary than the first, but was actually the more likely to lead to the repercussion of being caught or, quite frankly, sheer exhaustion.

At any rate, reflecting on this recently, I am reminded of the lessons these games hold in the oil and gas market. Bear with me.

The slide down the space between the up and down is in my mind the upstream oil and gas industry in a nutshell. It’s a high risk business where the “spikes” represent all the perils along the way – price volatility (including the current fall in prices); govenrment interference; access to and cost of capital; supply/demand dynamics; environmental costs; taxes; royalties; media frenzy; valuation; exploration risk; cost containment…

Screw up on one of these and you’re a wreck, but successfully navigate them and you experience the exhiliration of bringing the production to market and creating great wealth for your stakeholders. Yay!

Of course once you make it to the bottom, there is no rest, because you have to now start the second game and that one is maintaining or advancing your position as you trudge up the down escalator trying to maintain this newfound production while battling decline rates, depletion and all the other headwinds that affect an energy company. It’s an exhausting slog, requiring significant effort just to stay in one spot and a mad sprint to get to the top, only to have to do the crazy danger slide down to the bottom again. If you decide to rest for a second, you quickly find yourself approaching the bottom, requiring redoubled effort just to get back to where you were, let alone making it to the top.

So where are we in the cycle? Metaphorically (or should I say “metrophorically”). I would suggest the following:

Most of the energy market is stuck trudging up the down escalator and occasionally a tight oil company comes flying down the middle, some making it safely to the bottom but an increasing amount of them are hitting the spikes and spectacularly wiping out. A lot of producers and regions are at different stages on the climb and some are stopping (i.e. reducing their capex spend on new drilling) and we are trending dangerously close to the bottom of the escalator where there is soon going to be a collossal mess out of which someone is going to be required to lead the charge back to the middle if not the race to the top.

Or put more simply – production cuts are happening all over the place due to the headwinds of price and capital, and we are much closer to the bottom than the top of the escalator – who is going to have the energy and capital to put us back to the middle when we realize we have corrected too far? The energy sector still has many quarters of pain to work through the supply surplus, but the escalator (and more importantly the data) tell us what is starting to happen.

Prices as at September 18, 2015 (September 11, 2015)

• The price of oil rallied during the week before settlingrelatively unchanged on economic concerns
  • Storage posted a surprise decrease
  • Production decreased again
  • Markets reacted positively to the fundamentals
  • The rig count decreased
• Natural gas maintained pricing during the week primarily on weather

• WTI Crude: $44.93 ($44.77)
• Nymex Gas: $2.605 ($2.696)
• US/Canadian Dollar: $0.7565 ($ 0.7545)

Highlights

• As at September 11, 2015, US crude oil supplies were at 455.9 million barrels, a decrease of 2.1 million barrels from the previous week and 93.6 million barrels ahead of last year.
• The number of days oil supply in storage was 27.8, ahead of last year’s 22.1.
• Production decreased to 9.117 million barrels per day from 9.135 with lower 48 decreasing while Alaska prodcution increased marginally. Production last year at the same time was 8.672 million barrels per day.
• As of September 11, 2015, US natural gas in storage was 3,334 billion cubic feet (Bcf), which is 4% above the 5-year average and about 16% higher than last year’s level, following an implied net injection of 73 Bcf during the report week.
• Overall U.S. gas consumption decreased by 5% this week, with a 15% decrease in power use leading the way which is consistent with seasonal patterns
• Oil rig count at September 4 was down to 644 from 652 the week prior.
• Natural gas rigs drilling in the United States was up to 198 from 196.
• As of September 14, the Canadian rig count was up to 173 (23% utilization), 115 Alberta (22%), 36 BC (43%), 17 Saskatchewan (14%), 5 Manitoba (26%)). Utilization for the same week last year was 44%.

Drillbits

• The most recent data from the U.S. Federal Highway Administration show Americans drove a record 1.54 trillion miles during the first half of 2015, compared with the previous high of 1.50 trillion miles driven in the first half of 2007, contributing to higher demand for gasoline in the United States. Monthly data show gasoline consumption in the United States increased by 3% during the first half of 2015 compared with the first half of 2014.
• Canada Election Watch
  • An apparently “heated” debate happened in Calgary on Thursday.
  • All three parties are battling to stake out the middle ground and as a result the electorate is split evenly between all three
• Drumpf Watch – still ahead in the polls, but at the end of the debate he firmly owned the “get off of my lawn” look and while still blustery was clearly out-intellected by most of the rest of the panel, which says something. Suspect this is the beginning of the end for “Humble”.