Well look at that, another three months gone by and it is time to do a Q3 report card on my bold predictions. I would note that so far, there is no Trumpian risk factor showing up, but I expect that volatility may increase as we approach November 8th and by that I mean volatility of the market variety as well as the political.

 
At any rate, still happy with my forecast as far as it stands. Not like I was really out there on some of it – I am always in favour of a ball possession game.

Price of Oil

So, overall I think I predicted a rally in the price of oil and I take no responsibility as to how it unfolds. I think I should get points for the direction as well as the shorter term tactical calls on OPEC and all that other stuff that influences oil prices (you know, like storage, production and demand).

As a refresher, my year-end prediction was $60 a barrel for WTI and a $45 average price with most of the price appreciation in the second half of the year. As of September 30, the price of oil was $48.24 and the average price for the year to date was $41.58. So to hit my average price, we will need to see the current rally sustained into year-end which is eminently achievable given recent events, in particular the OPEC fake agreement to cap output at levels exceeding demand yet undercutting supply panic. I am still happy with my forecast, notwithstanding increasing rig counts and potential OPEC failings. $60 at year end it is and if that is right, the average price for the year should be good. I will leave my revised end of 2017 at $85. Grade B+.

Price of Natural Gas

I am starting to become a lot more constructive about the price of gas. The supply build was well below expectations over the summer and production is off. I realize a lot of this is due to reductions in associated gas produced in tight oil formations, but there has been significant decline in pure play shale gas areas such as the Marcellus. That, combined with the ongoing shift from coal to gas for electricity generation and considerable demand growth year over year is providing impetus for prices. Prices are currently just over $3.00 which is a relief for many. My year end prediction was $3.50, which I am more confident will happen, but getting to my annual average price of $2.75 is going to require some serious price assistance. September 30 price was $2.906 and the YTD average was $2.349. As I said, to hit the average, we need some help. Grade C+.

Production

In the forecast we discussed production across a range of producing regions.

The main part was an expected 500,000 bpd decline in the US. At this point, production is off by almost 800,000 bpd, so this expectation looks pretty solid even if the recent price rally prompts increased DUC development and drilling.

There was an expectation that Russia and OPEC would maintain current levels of production which, the context of the recent OPEC agreement to cap production at early year averages may hold true. Production in Iraq seems to have plateaued, Nigeria is dealing with ongoing militant attacks that have played havoc with production and Libya is Libya. Iranian crude production has recovered to just below pre-sanction levels. The ongoing crisis in Venezuela is having a major impact on production there which is off more than 500,000 barrels.

Another expectation was a poorly defined “other non-OPEC, non-Russian” production being down a similar amount to the US. This covers South American and Mexico where the data is hard to get as accurately as desired, but all countries are expected to be flat or down this year.

Overall, the production call appears to have been optimistic as production levels are falling more rapidly than expected in certain areas while others (Russia and OPEC) are growing.

That said, we appear to have reached the average “bottom”.

Overall Grade B.

Activity Levels

I said 2016 was going to be a train wreck and for the first three quarters it certainly was. Decade lows in utilization combined with an early breakup to produce one of the worst quarters the WCSB has seen since the late 1980s in Q2. Q3 saw a halting return to activity but still way shy of typical levels, even in a low price environment.
Grade – Yuck.

Canadian Dollar

I made a short term call that the Canadian dollar would likely rally through Q1 to about $0.75 based on what the Fed did and oil prices and it did. That was a good call. The dollar currently rests at about $0.76. End of year is of course another matter – I had suggested $0.80 to $0.85 but $60 oil is needed to take it there. Grade B

M&A Activity

This is starting to pick up, but not as much as expected so far. There has been a lot of equity capital raises so far as companies fix their balance sheets, but so far not a rush of M&A into either the service sector or the E&P space. Anecdotally, we also haven’t seen the number of insolvencies we had expected in Canada. Based on anecdotal evidence from clients and capital sources, we expect this to pick up through Q4. Grade – Pending

US Election

I predicted a Drumpf-caused implosion of the Republican party with a Rubio-Kasich ticket emerging and getting thumped by Hillary and the Democrats. While the Hillary result may be the same, the Republican ticket is now fully Trumped so half right but mostly wrong on the GOP side. I remain convinced that a Drumpf presidency is not going to happen and while up until September 30 there was still a statistical chance, in the current sexually charged environment, I see little chance of him carrying anywhere near enough votes to win.

Infrastructure Projects Approved

In m year end forecast I said that three major energy projects would be approved or get the nod, mistakenly shortening the time frame on Energy East (sorry). So far, the Pacific NorthWest LNG project has been approved and hopes are high for Transmountain. So, really, 1 for 2, keep your fingers crossed. Grade – C+

Stock Picks

A couple of star performers and a couple of laggards. Mullen gathered some steam in the second half. Suncor has suffered due to the Fort Mac shutdowns and the significant losses they will incur as a result of that. I’m loking what is happening with EOG even if it is probably $10 ahead of where I thought it would be.

All in all, a decent run so far. I look forward to the final quarter! Grade B+

Prices as at October 14, 2016 (October 7, 2016)

• The price of oil ended the week up mostly on OPEC enthusiasm.
  • Storage posted a large increase
  • Production was down marginally
  • The rig count was up
• Natural gas was pretty flat during the week, but gained ground at the end of the week

• WTI Crude: $50.35 ($49.81)
• Nymex Gas: $3.285 ($3.193)
• US/Canadian Dollar: $0.7622 ($ 0.7536)

Highlights

• As at October 7, 2016, US crude oil supplies were at 474.0 million barrels, an increase of 4.9 million barrels from the previous week and 37.4 million barrels ahead of last year.
  • The number of days oil supply in storage was 29.4, behind last year’s 29.8.
  • Production was down for the week at 8.450 million barrels per day. Production last year at the same time was 9.096 million barrels per day. The change in production this week came from a slight increase in Alaska deliveries and a decrease lower 48 production.
  • Imports rose marginally to 7.861 million barrels a day, compared to 7.315 million barrels per day last year.
  • Refinery inputs were off during the week at 15.552 million barrels a day
• As at October 7, 2016, US natural gas in storage was 3,759 billion cubic feet (Bcf), which is 5% above the 5-year average and about 2% higher than last year’s level, following an implied net injection of 79 Bcf during the report week.
  • Overall U.S. natural gas consumption was up 2% during the week on increased power consumption
  • Production for the week was flat and imports from Canada fell by 1%
  • The gas story in the United States is increasingly bullish as additions to storage have significantly slowed relative to prior years as the heating season approaches
• As of October 3, the Canadian rig count was at 123 (18% utilization), 96 Alberta (21%), 16 BC (22%), 9 Saskatchewan (8%), 1 Manitoba (7%)). Utilization for the same period last year was about 25%.
• Oil rig count at October 14 was at 432, up 4 from the week prior.
  • Rig count at January 1, 2015 was 1,482
• Natural gas rigs drilling in the United States was up 11 at 105.
  • Rig count at January 1, 2015 was 328
• US split of Oil vs Gas rigs is 80%/20%, in Canada the split is 55%/45%
• Offshore rig count was flat at 23
  • Offshore rig count at January 1, 2015 was 55

Drillbits

• RIP Jim Prentice and his as yet to be indentified flight mates. The former Premier of Alberta and Federal Conservative MP perished in a plane crash outside of Kelowna last night. Our deepest sympathies to all families and friends.
• Oil production in North Dakota fell below 1 million barrels a day in September for the first time since 2010
• A group of protestors managed to vandalize five oil pipelines in the United States and shut down shipments temporarily. There is a fine line between activism and extremism. Consider it crossed.
• Drumpf Watch – Sexual assault. Dog whistle nonsense. Invocation of global financial cabals and other paranoia. Accusations of vote rigging. I think we are witnessing the end – is it even worth having another debate?