Look, I have to write about it, it’s become a big deal and it is the most compelling/interesting thing going on in the energy sector this week.

 
That’s right, I’m talking about an apparent Canadian invasion of New York City, with Rachel Notley attending “Climate Week” and Justin Trudeau addressing the 71st General Assembly of the United Nations. I mean seriously, has there ever been a time when a confluence of events has brought Canada’s leaders so close to the power and influence we so desperately crave? In one fell swoop, we are once again relevant and powerful, rubbing shoulders with world leaders and earning praise from Barack (Lame Duck) Obama.

Ach, who am I kidding. That’s not at all what I want to write about. That hardly registered with me – I had to Google why each of them were even there and quite frankly I’m still not sure why Rachel Notley bothered.

No, what I want to write about is the bold move announced by Environment Minister Catherine McKenna and the Federal government that “any province that doesn’t introduce a price or other mechanism to reduce carbon emissions” is going to have something imposed by the Federal government. This is a bold and sweeping gesture, but, as with so much on the climate file (and the federal government handling of it), it’s a lot of hot air given it is a massive intrusion into provincial jurisdiction and, since 80% of the population is already covered, who are they really going to lean on? I’m looking at you PEI!

OK, you’ve got me. That’s not it either.

What I really want to highlight is something that rightly or wrongly is dominating the headlines and the price discussion around oil this month, namely the informal meeting that may morph into a formal meeting in Algiers next week at an International Energy Conference between OPEC and non-OPEC producing nations (hello Russia), which as you recall, I have elected to call OPECR, mainly because it’s fun to say out loud. In all seriousness, the meeting will be attended by energy ministers from all OPEC member states and, of course Russia. Together, they represent, at current levels of production, about 45% of global supply.

The purpose of these informal talks is to discuss the persistent over-supply situation and determine whether this gaggle of self-interested dictators, demagogues and divas can set aside their mutual animosities for long enough to actually act rather than talk.

What’s at stake

What’s at stake is what is always at stake, nothing less than the economic future of the world! Well maybe not, but it would appear that after some serious soul-searching, and a look at their bank accounts, the consensus around OPEC, and specifically Saudi Arabia, has turned to a view that something needs to be done.

What could they do?

In the context of the never-ending OPEC cut/cap/freeze/ceiling debate there are a myriad of options, but if you sort through the noise there are a number of options available which range on a scale from meaningless to meaningful with an actual commitment to a “cut” the big enchilada.

Most of the analysts who think something might be done expect some form of agreement to cap output for the next 12 months at some amount related to actual production throughout the year, probably an average production level for the year. This would result in a pull-back in production in the order of some 1 million barrels a day. Inside of this will be some form of dispensation for Nigeria and Libya to increase their production, as their numbers have been held down artificially by war and terrorist attacks on infrastructure. This would be the middle of the road scenario that would result in a reduction in global inventories of 200 million to 300 million barrels.

There is also the possibility that a higher output cap is used given that all OPECR participants are currently producing at their highs for the year. This would be interpreted by the market as a do-nothing and would likely undermine any future credibility OPEC had when it comes to discussing markets.

There is of course a third possibility – an actual production cut. Given that OPEC has a bit of a reputation for confounding the market just when they think they have OPEC figured out, in particular when meeting in Algeria, there is always a chance that they catch a bit of Algerian Fever and put forward a production cut. A 5% cut across the board (including Russia) with dispensation again for Nigeria and Libya would take 2 million barrels a day off the market for a theoretical reduction in inventories of 400 million barrels over the next year. This would be a game changer announcement, assuming follow through. No one really expects this.

The last and widely acknowledged most likely possibility is that the whole discussion goes nowhere

What’s Different this time?

Well aside from the fact that this is an “informal” meeting, what strikes me as different is the amount of pre-meeting diplomacy and discussion going on between the various players. Most specifically mega-rivals Saudi Arabia and Iran have held meetings at the OPEC mother ship in Vienna which appear to have not resulted in any agreement, but the fact the meeting occurred shows that this is more than lip service. In addition, major producers such as Iraq and Russia are saying some of the right things in the lead up to the meeting, that is, when they aren’t saying absolutely the opposite – isn’t oil politics great?

While this is usually a lot of hot air, the production profile for the group is different now even from the failed Doha meeting in April, with all members producing at near record levels and Iran having recovered much of its pre-sanction production before stalling out at the current level of 3.6 million barrels a day. This makes a “cap” of some sort not so difficult to conceive.

In addition, there has been near universal commentary on a willingness to do something, including from Russia, with Putin musing that they could do a 5% cut, to Iraq signalling its willingness to participate in a freeze, to an apparent offer from Saudi Arabia to cut production if Iran froze its production at current levels and of course Venezuela leading the way with cuts of its own due to a collapsing economy.

So what is the likelihood of something being accomplished?

If you go by the consensus of analysts, then the odds of an actual agreement at this meeting are twice what they were for the last meeting, which of course is two times zero. So, if you were a gambling man, this would not be the time to go all in on a production cut/cap/ceiling/freeze.

And it’s hard to disagree, there is great difficulty in getting this misaligned group to reach a consensus on anything, but it appears that this time there is at least a little more effort being put into it.

As mentioned in this space last week, I am of the view that the Saudi strategy since 2014 to remove quotas on production was for them, as a nation, a strategic blunder. I caught a lot of flack for that from a number of readers, but stand by it. Given the legs this particular incarnation of the OPEC meeting seems to have, if anything comes out of this meeting it represents the beginning of walking back that strategy.

So I am going to take the contrarian route, I give this specific meeting a 10% chance of producing a freeze of output at some level that the market can get a good signal from and a 1 in 100 chance of an actual output cut and I wouldn’t be too surprised if one eventuially happened. And I think the impetus for this is coming 100% from Saudi Arabia, no one else has any clout. So I predict a 50% chance that the Saudis impose their will and get something in place for the formal November OPEC meeting.

Look – I know it looks as if I’m mailing it in, but we all know how hard it is to get a group of people to agree on where to go for lunch, nevermind voluntarily reducing your economic lifeline for a supposed greater good.

So I think there’s a chance. Enforcement and participation? That’s a whole other story and the odds there are pretty slim.

Ball is in your court Saudi Arabia.

Prices as at September 23, 2016 (September 16, 2016)

• The price of oil ended the week up slightly mostly on muted optimism for an OPEC action.
  • Storage posted a surprise decrease
  • Production was up marginally
  • The rig count was up
• Natural gas was pretty flat during the week, but did briefly break through the $3 threshold

• WTI Crude: $44.48 ($43.03)
• Nymex Gas: $2.955 ($2.948)
• US/Canadian Dollar: $0.7595 ($ 0.7570)

Highlights

• As at September 16, 2016, US crude oil supplies were at 504.6 million barrels, a decrease of 6.2 million barrels from the previous week and 50.6 million barrels ahead of last year.
  • The number of days oil supply in storage was 30.2, ahead of last year’s 27.8.
  • Production was down for the week at 8.512 million barrels per day. Production last year at the same time was 9.136 million barrels per day. The change in production this week came from an increase in Alaska deliveries and a slight rise in lower 48 production.
  • Imports rose to 8.369 million barrels a day, compared to 7.176 million barrels per day last year.
  • Refinery inputs were high during the week at 16.587 million barrels a day
• As at September 16, 2016, US natural gas in storage was 3,551 billion cubic feet (Bcf), which is 8% above the 5-year average and about 4% higher than last year’s level, following an implied net injection of 52 Bcf during the report week.
  • Overall U.S. natural gas consumption was unchanged during the week on increased power consumption
  • Production for the week was down 1% and imports from Canada fell 2%
  • 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 September 20, the Canadian rig count was at 122 (18% utilization), 82 Alberta (18%), 9 BC (12%), 30 Saskatchewan (26%), 1 Manitoba (7%)). Utilization for the same period last year was about 25%.
• Oil rig count at September 23 was at 418, up 2 from the week prior.
  • Rig count at January 1, 2015 was 1,482
• Natural gas rigs drilling in the United States was up 3 at 92.
  • Rig count at January 1, 2015 was 328
• US split of Oil vs Gas rigs is 82%/18%, in Canada the split is 52%/48%
• Offshore rig count was unchanged at 20
  • Offshore rig count at January 1, 2015 was 55

Drillbits

• News from the “seriously, what is with these people” department
  • The City of Vancouver voted to ban the use of natural gas by 2050
  • A coalition of American and Canadian First Nations from BC, North Dakota and Quebec signed agreements to oppose any pipeline project moving Alberta oilsands crude. It remains to be seen how this is received by those other First Nations who invest, work and profit in the energy industry
  • The Obama government continues to block construction on an almost complete pipeline project in South Dakota
• Canada exported 3.46 million barrels a day to the US last week, a record, straining pipeline capacity and forcing increased use of super-safe rail
• Seven Generations has entered into an export development agreement with Vancouver based Steelhead LNG to explore infrastructure development and open new overseas markets for Canadian natural gas. In english, I think this means that Seven G thinks the Steelhead LNG project has legs. Perhaps the Steelhead guys could place a call to Vancouver city council…
• A recent survey of analysts suggested that global oil and gas capex is expected to grow next year for the first time since 2017. A modest 2.5% grwoth rate is prolected, followed by larger gains in 2018 and 2019
• Drumpf Watch – Where to start? Sensing that he may have a chance to win, Drumpf went back to some of his typically bombastic and insensitve ways in some public speeches. He has also found himself under fire from accusations of “self-dealing” with his charitable foundation’s money – specifically using the Foundation’s cash to settle a personal lawsuit, more than once. Not content to be left on the sidelines, mini-Drumpf entered the fray with a tone deaf tweet comparing refugees to Skittles. All eyes will be on the debate this coming Monday. Set your PVR for what should hopefully be a wild ride.