Abbreviated this week AND late, but please read to the end, and no hoarding!

 

Another week, another 7 days of mayhem and chaos across the globe as the insanity of Coronavirus Panic sweeps North America and picks the scab off of civil society – exposing the festering underbelly of human nature while all the while governments attempt to wrestle this crisis to at the very least a stalemate.

 

I’m not going to get on too much about what is happening in grocery stores as I am kind of all done with that. From the absurd run on toilet paper to the panic buying of chicken (not beef!) or the evisceration of the hand sanitizer section while leaving the bar and liquid soap section relatively untouched, the actions of John Q Public are, what can I say, puzzling. Don’t even get me started on the people buying all the bread and milk (for freezing!), or the bizarre refusal to buy low sodium frozen French fries (hey – hoarders have standards man!).

 

Look, people are going to do what they are going to do and will keep doing it until someone tells them they can’t. But it feels like while we live in a society of plenty, the insane and selfish actions of a few are soon going to lead to rationing for the many. It’s crazy. Watching people buy up all the cheap stuff and essentials so that they can fortify themselves against the zombie apocalypse thus putting maximum stress on supply chains will only lead to eventual price inflation for those less fortunate or less able to access stores at will – never mind that they are being forced to buy higher end items because all the affordable stuff is gone (except of course the aforementioned low sodium no-name fries).

 

Anyway, I think you know where I am going with this, coronavirus and all its ancillary issues are bringing out the best and the worst of us. I have no intention of lecturing people on what to do or how to act. I am a commenter, not a policy maker. You do you, I’ll do me. Speaking of me, me made a pretty useless forecast on oil last week so I am going to try it again.

 

Last week I pontificated that OPEC and OPEC+ would likely settle at some agreed cut of production in the range of 600,000 boepd for the good of the world and, well, I couldn’t have been more wrong.

 

As everyone knows by now, that isn’t what happened at all. Over the weekend, Russia walked away from OPEC+ and Saudi Arabia had a hissy fit. The end result was the cratering of the 3 year OPEC/Russia alliance and a brand new price war which dragged oil prices down 20%, the stock market down 7%, oil stocks down an average of 45%, kicked the Alberta economy into the gutter, shoved tight oil into a dumpster fire, slashed capex budgets and flushed the employment prospects for energy-related workers across North America into a swirling garburetor of existential nothingness.

 

And that was just Monday!

 

So how did I miss this so badly? Well reason number 1 is because from an economic perspective, for the Saudis it makes absolutely no sense. Based on prices and production heading into the weekend and the new levels of production and current pricing at the end of the week, the Saudi move on paper will cost the Kingdom $100 million per day or $92 billion if it lasts the year.

 

Many people are saying this was orchestrated by the Russians as some kind of world destabilizing master-plot from Putin, but I don’t buy it. The Russians may be OK with it, but ultimately they don’t have the stroke to move markets in this fashion. Saudi Arabia is the swing producer – they are the only producer able to add or subtract market moving amounts of product at will. They own the market. They have borne the “pain” of output cuts and when others decided they didn’t want to play along anymore, they pulled the plug. Saudi Arabia can withstand $30 oil indefinitely. Sure they need $75-$80 or whatever to balance their budget, but that doesn’t matter. The dude who suffers from government cutbacks isn’t the despot sitting on the platinum throne or driving the gold Ferrari. These moves don’t affect the ruling class, so who cares?

 

The way to look at this is to try and determine what the Saudi hope to gain over the short to medium term as a result of this move?

 

First, they have sent a signal to Russia that they won’t be pushed around or taken for granted. Not that Russia cares – they will produce what they were going to produce anyway. The alliance was never much more than one of convenience. Point made though.

 

Second, they have put the first, second and last nail in the coffin of the tight oil phenomenon. Why do I say this? Well if at $45, most tight oil was marginal, then at $32 it is absolutely offensive as an investment.

 

If you recall, last week I mentioned how much tight oil production was 2019 vintage wells – more than 50%. The Saudis have that data too. That calculus, an absurd leverage into just completed production, combined with coronavirus demand destruction and the duly noted capital constraints in the patch had to be too much to let pass by. Put another way, with demand crashing, political chaos, a growing first world environmental movement and a closed capital market, the opportunity to take the kill shot at an industry that has been sucking up market share had to be insanely tempting, so they took it.

 

And that kill shot hit the proverbial bullseye. Taking into account only a week’s worth of capex revisions, projections are currently suggesting the rig count may fall by as much as 30% in the United States with completions falling by a similar amount – this on top of an already reduced capital spend for 2020. Given this set of facts, it will be virtually impossible for tight oil producers to maintain volumes year over year and with the decline profile of so much front-loaded production we could see a decline of 500,000 boepd before Labour Day.

 

So what does it mean for Canada?

 

I will do this more fulsomely in a later blog, when people are paying more attention.

 

Suffice it say that this is actually bullish for Canada. How do I get there? I combine the political and the industry. The tight oil is getting kicked in the nuts, there is no other way to describe it. And the Democrats are going to beat Trump. This is by no means guaranteed but as every passing day of the Coronavirus crisis passes, it seems more likely. This means less government support for tight oil and more restrictions on fracking. But no self-respecting Democrat is going to miss Saudi Arabia kicking the US while it was down so the prospects for KXL are much improved.

 

Just a theory, but it’s a good one, no?

 

In the meantime, I just filled my beastly environment killing SUV at $0.779 per liter, a price last seen, well, more than 10 years ago.

 

Want to inject a massive amount of liquidity directly into the consumer pocket as quickly as possible? Cut gas prices. I put about 50 litres in my tank each week (I drive a lot) and the average price for the last year is about a dollar a litre. Assuming prices hold in this range, Saudi Arabia just saved me $500.

 

It’s the lead lining in an otherwise distressing situation for the energy world.

 

 

Barb

 

“Mr. Parnell …”

 

Oh no, what have I done now?

 

Anytime I get an email introduced that way in reply to my blog, I am fairly sure that no good could come if it. Guaranteed I was about to be read the riot act.

 

Little did I realize how wrong I was, never mind how much I would look forward to the ongoing regular email with the same formal introduction.

 

One thing I never anticipated and wasn’t prepared for when I started writing this blog was the personal connections that I would make with some of my readers and the dialogue and interaction that would ensue.

 

But that’s kind of unavoidable, isn’t it? Humans are hard-wired to be social and if you’re going to throw your opinions out there, you have to know that where they land will bring you feedback, a voice that keeps you honest, grounded and proper.

 

And for me, that voice was Barb.

 

Mr. Parnell  – Merry Christmas…

 

A regular follower, Barb is the mother of one of my subscribers and had been following the blog for some time, initially I am told because she appreciated the subject matter I wrote about and in general shared many of my views.

 

At some point, she decided to reach out and I am so glad she did.

 

From the early occasional comment, my interaction with her grew over time to a regular email offering praise, criticism, article ideas to more serious discussions about what was happening in her life.

 

We discussed a shared disdain for the toxic political environment, disagreed at times about the relative merits of this party or that, but shared a mutual love of country, desire to see Canada and the energy sector succeed and traded thoughts on what the federales needed to do to make that happen.

 

 “Mr. Parnell….. Just finished reading this week’s Crude Observations.”

 

She was never shy about pointing out flaws in my arguments or praising me when she felt I got something right. I like to think the balance was tilted to the latter.

 

Not unexpectedly, as the months passed, I began to look forward to her emails and was disappointed when I didn’t get anything. Had I done anything to upset her? Did I miss something? Maybe I was too crude (I did get called out for that). It didn’t matter, I needed and looked forward to the interaction. It may have been important to her to reach out, but she was probably not aware of how much it meant to me.

 

Just before I went on my recent trip, I received an email wishing me well on my hike and a book recommendation – which by this point I understood to be 100% Barb. This was the last email I would receive from Barb.

 

Barb passed away in late February.

 

I will miss her.

 

I never met her in person, but she was a friend in the way that social media allows us to make friends with like minded people that we could never conceivably meet. I knew something about her and got to meet one of her kids (it feels weird saying that – he’s older than me!). But as they say, if you judge the parent by the child, she was pretty awesome. I also shared details about my family that allowed her to get to know me and my family. This was a connection that I never expected to make when I started to do this blog and I am grateful for the opportunity.

 

Barb’s passing was due to a rare condition called IPF (Idiopathic Pulmonary Fibrosis).

 

There is a society called the Canadian Pulmonary Fibrosis Foundation (www.CPFF.ca). It raises funds for research into chronic respiratory diseases. I encourage you to look at their mission and decide whether this is right for you to add to the list of charities you contribute to. I know it is for me.

 

https://cpff.ca/

 

Thank you Barb, for your words of wisdom, your encouragement, you engagement and your friendship.

 

I will miss our conversations.

 

Stay safe everyone. Wash your hands. Be kind.

 

Prices as at March 13, 2020

• Oil prices
  • Oil storage was up, product usage was high
  • Production was down marginally
• Natural Gas
  • Storage below last week, but historically very high; consumption down; production flat; exports flat.

• WTI Crude: $33.25 ($41.43)
• Western Canada Select: $19.10 ($27.53)
• AECO Spot: $1.786 ($1.73)
• NYMEX Gas: $1.892 ($1.722)
• US/Canadian Dollar: $0.7178 ($0.7449)

 

Highlights

• As at March 6, 2020, US crude oil supplies were at 451.8 million barrels, an increase of 7.7 million barrels from the previous week and a increase of 2.7 million barrels from last year.
  • The number of days oil supply in storage is 28.4 which is 0.2 above last year at this time.
  • Production was down marginally for the week at 13.000 million barrels per day. Production last year at the same time was 12.000 million barrels per day.
  • Imports increased to 6.412 million barrels from 6. 238 million barrels per day compared t0 6.746 million barrels per day last year.
  • Crude exports from the US decreased to 3.410 million barrels per day from 4.154 million barrels per day last week compared to 2.803 million barrels per day a year ago
  • Canadian exports to the US decreased to 3.624 million barrels a day from 3.644 million barrels per day last week
  • Refinery inputs increased during the week to 15.702 million barrels per day
• As at March 6, 2020, US natural gas in storage was 2,043 billion cubic feet (Bcf), which is 12.5% above the 5-year average and about 64% higher than last year’s level, following an implied net withdrawal of 48 Bcf during the report week
  • Overall U.S. natural gas consumption fell by 10% during the report week.
  • Production fell 1% for the week. Imports from Canada fell 20% from the week before. Exports to Mexico was unchanged week over week.
  • LNG exports totaled 51 Bcf
• As of March 6, 2020, the onshore Canadian rig count decreased 27 to 173 (AB – 127; BC – 15; SK – 29; MB – 2; Other – 0). Rig count for the same period last year was 160.
• US Onshore Oil rig count at March 6, 2020 is at 683, up 1 from the week prior.
  • Peak rig count was October 10, 2014 at 1,609
• Natural gas rigs drilling in the United States is down 2 at 107.
  • Peak rig count before the downturn was November 11, 2014 at 356 (note the actual peak gas rig count was 1,606 on August 29, 2008)
• Offshore rig count was flat at 19.
  • Offshore peak rig count at January 1, 2015 was 55

US split of Oil vs Gas rigs is 86%/14%, in Canada the split is 66%/34%

 

Trump Watch: Hey – this coronavirus is a thing, right?

Kenney Watch (new!): Doctors. They matter, right?

Trudeau Watch (for balance): Phoning it in on doctor’s orders, right?