So here I sit, housebound by the excruciating cold snap we are going through as well as by (currently shirked) parental responsibilities towards a sick kid. At any rate, other things I should be working on than this blog right? So I will keep it short, like my trips outside. -25? Seriously?

So clearly I am a little less focused than usual which means a bit more of a shotgun approach this week, aimed at my favourite target of course – you got it, the hyperventilating media.

Most of the articles that got under my skin this week had to do with the aftermath of the OPEC cut, mainly a whole series of negative articles detailing how the OPEC cuts aren’t going to work, blah, blah, blah, etc. ad nauseaum

First up, there was this article about China, leading off with a particularly scary headline and excerpted text:

“One of the biggest engines soaking up the world’s oil is starting to sputter.
Growth in crude imports by China, the second largest consumer after the U.S., will probably slow by more than 60% in 2017, according to a Bloomberg survey of analysts
While OPEC’s deal to curb output may help erode a glut and lift prices, Chinese imports remain key for any sustained recovery.
Inbound shipments into China in the first 11 months of 2016 rose 14% to 7.5 MMbopd, touching monthly records twice, according to customs data. Next year, though, the Asian nation will boost its purchases by just 4.8% compared with 2016, according to the median estimate of eight analysts in the Bloomberg survey.”

Sounds awful, right? I mean holy Toledo, 60%?!?!?! And this is hanging over the oil price. But, and it’s a big but – I will not lie, we need to parse the numbers a bit.

First, we are talking about a 60% drop in the growth rate of imports, not actual imports. So, what we are saying is that China is going to buy more oil this year. Isn’t that enough? A 5% increase on 7.5 mm bpd is a not inconsequential 375,000 bpd. And compares, on an absolute basis, to 921,000 bpd growth the previous year. Also keep in mind that in 2016, China cut back on 400,000 bpd of expensive domestic production contributing to that spike in imports. So in two years, Chinese imports are predicted to rise an impressive 1.3 mm bpd, or 20% or 10% per year. How again is this a problem in a tightening supply market?

Here’s another one that is bugging me from Bloomberg:

“Oil extended declines below $51 a barrel amid speculation a production boost from U.S. shale producers will counter the first output cuts from OPEC in eight years.
…

“The potential for U.S. producers to spring back into action is putting a cap on gains,” said ***, chief market strategist at ***.”

So, bear with me here, but the last time I checked, oil trades in a spot market and the price, while it contains a speculative element, is largely reflective of current levels of supply and demand. Before we all get too excited about the potential for US shale supply to crater the market, let’s review some basic facts. It took the United States three years, 1500 rigs going flat out, $100 oil and billions of dollars of outside capital to add about 3 million barrels of oil a day in production across Texas, New Mexico, Colorado and North Dakota. The current rig count is about 500. I don’t really care if the rig count has gone up by 60% YTD, I am much more interested in how in the world people think that drilling activity is set to triple and that tight oil is some kind of spigot that can be turned on or off at will by a $2 move in the price of oil or a 4.5% cut in OPEC output.

There is nothing more annoying than flip commentary that belies a lack of knowledge of the investment, the equipment and the manpower required to actually get drilling again at the scale we previously witnessed. And as anyone who works in the patch knows – manpower is scarce because everyone has left, equipment is two years older and has been pillaged for parts and capital is in short supply anywhere outside of producers operating in the Permian. So, where is this massive ramp-up going to come from?

Even the EIA says this is going to take some time. It released its latest Short Term Energy Outlook (STEO) raising its forecast for US production that Bloomberg ominously reported on (US Production set to Grow!) and the price of oil moved down by $2. But the EIA only raised its forecast for 2016 and 2017 by 20,000 barrels a day and 50,000 barrels a day respectively – on 8.8 million barrels! Can anyone say a drop in a barrel?

The other bit of news commentary that was a bit misleading was the commentary around OPEC accepting natural decline of oilfield production for cuts as opposed to the mythical tap being shut off (note to world, there is no tap). The media acted like this was a crisis and evidence that OPEC wasn’t serious about cutting. I don’t get it. Really I don’t. A barrel less of production is a barrel less of production. It doesn’t matter how it happened. It doesn’t matter if you shut in production, stop investing new production stop shipping, whatever. The end result of lower barrels is identical. Isn’t it? Isnt’t it? Am I missing something?

My final point for the day is in regards to the announcements by InterPipe and Pembina about the combined investment of $6 billion in separate petrochemical facilities in Alberta, taking advantage of the Alberta Government’s $500 million royalty subsidy. These projects will generate thousands of jobs during construction and millions of dollars in tax once completed. It also represents a downstream diversification of the Alberta energy economy into value-added processing of abundant and cheap propane feedstock.

Yet the government was taken behind the woodshed by the media and opposition for this announcement because “subsidies” and “need to lower taxes” and “free market” and “$200,000 per job created” and “not really diversification”.

Can we rewind the tape a bit? When the Alberta government announced the new Royalty Framework, this incentive or subsidy was actually lauded as one of the best elements.

Western Canada has been blessed with some of the finest natural gas, natural gas liquids and oil resources in the world, but export markets to the US are challenged, demand in the oilsands has currently peaked and LNG is still a lifetime away from reality. So is there a way to encourage drilling activity? How about creating new demand – like, I don’t know, a petrochemical plant or two.

Back before the oilsands started churning out cash, the royalty take of the Alberta government was dominated by natural gas and natural gas liquids. Are well so hypnotized by oil export pipelines that we no longer want the royalties and economic activity that come from an active natural gas market?

I say, bring it on. Get off your ideological pony and welcome $6 billion of private sector investment in our province at a time when those investments are few and far between. Sheesh.

Prices as at December 9, 2016 (December 2, 2016)

• The price of oil bounced around during the week on speculation about how the OPEC agreement would unfold and the prospects of non OPEC participation. We should all expect more volatility as the market better absorbs the impact of all these moves.
  • Storage posted a surprise decrease
  • Production rose by a rounding error
  • The rig count in the US and Canada continues to grow
• Natural gas was up sharply during the week as we move into withdrawal season

• WTI Crude: $51.50 ($51.68)
• Nymex Gas: $3.746 ($3.436)
• US/Canadian Dollar: $0.7597 ($ 0.7521)

Highlights

• As at December 2, 2016, US crude oil supplies were at 485.8 million barrels, a decrease of 2.3 million barrels from the previous week and 32.2 million barrels ahead of last year.
  • The number of days oil supply in storage was 29.8, ahead of last year’s 29.5.
  • Production was down for the week by 2,000 barrels a day at 8.697 million barrels per day. Production last year at the same time was 9.164 million barrels per day. The change in production this week came from no change in Alaska deliveries and a small decrease in lower 48 production. With the increase in rig counts since the summer and some stability in pricing, we have likely seen a stabilization in production numbers
  • Imports jumped from 7.548 million barrels a day to 8.303, compared to 8.021 million barrels per day last year.
  • Refinery inputs were up during the week at 16.417 million barrels a day
• As at December 2, 2016, US natural gas in storage was 3,953 billion cubic feet (Bcf), which is 7% above the 5-year average and about 1% higher than last year’s level, following an implied net withdrawal of 42 Bcf during the report week.
  • Overall U.S. natural gas consumption was up 15% during the week as cold weather set in and demand increased across all sectors
  • Production for the week was down 1% and imports from Canada rose by 6% from the week before
• As of December 5, the Canadian rig count broke past the psychologically significant 200 level to hit 202 (30% utilization), 142 Alberta (31%), 21 BC (28%), 37 Saskatchewan (32%), 2 Manitoba (13%)). Utilization for the same period last year was about 24%.
• US Onshore Oil rig count at December 9 was at 498, up 21 from the week prior.
  • Rig count at January 1, 2015 was 1,482
• Natural gas rigs drilling in the United States was up 7 at 126.
  • 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 unchanged at 22
  • Offshore rig count at January 1, 2015 was 55

Drillbits

• TransCanada announced that it was moving forward with its $655 million the Saddle West Project, which will increase total natural gas transportation capacity on the northwest portion of its system by approximately 355 million cubic feet per day (MMcf/d).
• Cenovus announced plans to invest between $1.2 billion and $1.4 billion in 2017, a 24% increase compared with the company’s forecast capital spending for 2016. The 2017 budget includes capital to resume construction of the phase G expansion at Cenovus’s Christina Lake oil sands project and to invest in attractive conventional oil drilling opportunities with high-return potential in southern Alberta.
• The Alberta government announced the allocation of $500 million in royalty credits to InterPipeline and Pembina Pipelines as support to their plans to build two separate petrochemical facilities having a combined capital budget of approximately $6 billion
• Crescent Point Energy Corp. announced a $1.45 billion capital expenditures budget for 2017.
• At $137 million, sales of Crown drilling rights in Alberta have fallen to their lowest levels in 39 years.
• Rachel Notley took her pro-pipeline, carbon tax, market access show to BC for two days of radio interviews and merciless social media hackery from anti-pipeline activists. I think anytime you can get out of that and not be tarred and feathered, it can be considered a success.
• Trump Watch: The Donald continues to fill out his cabinet. Most recent appointment on note is noted small business expert Linda McMahon, formerly of WWE fame to the post of …. Interestingly also the largest donor to Donald’s fake foundation – the one that pays his legal costs and buys giant portraits. I honestly don’t know how manages his conflicts – I guess there are so many that they cancel each other out? Only explanation I can think of!