Well look at that, another three months gone by and it is time to do a Q2 report card on my bold predictions. I am not sure how I was supposed to factor Brexit and the like into my fearless forecast, but I guess world events are always a risk, and that for every negatiove to a forecast, there can always be a positive.

 

Also it is July 1 (or June 31 according to my watch) and that means it is Canada’s birthday. Congratulations Canada on 149 years of hockey, apologizing, toques, good government, prosperity and just general all around awesomeness. If Canada had arms it should be patting itself on the back because let me tell you, the rest of the world? Not so much, eh?

 

And yes, Happy July 4th Independence Day to everyone south of the border. Please stop making movies about aliens blowing stuff up.

 

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

In my ramblings, I held out that the price of oil would start to rally during the year. And guess what? I was right! Yay! Do I get a prize? Don’t think so, the reality is that a rally was the easiest predcition, it’s really more about the scale of such a rally.

 

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 June 30, the price of oil was $48.33 and the average price for the year to date was $39.86. So to hit my average price, we will need to see the current rally sustained into year-end which is eminently achievable given where supply and demand fundamentals currently sit. While I am seeing prognosticaors pull back on their year end numbers due to DUCs and various other theories, I can’t bring myself to do that. $60 at year end it is and if that is right, the average price for the year should be good. Just to stir the pot, I am revising my end of 2017 up from $80 to $85. Grade B.

 

Price of Natural Gas

Well, someone, somewhere is happy about the price of gas, but I can tell you it’s not the producers. That said, there is a silver lining as all that time with low prices has finally led to some fairly significant and recent production declines. That, combined with the ongoing shift from coal to gas for electricity generation is mitigating another fairly robust injection season. Prices have recently risen quite briskly to the $2.90 range which is a relief for many. My year end prediction was $3.50, which I am more confident will happen, but I’m still having trouble getting to my annual average price of $2.75 without some major assistance from good ole global warming. June 30 price was $2.924 and the YTD average was $2.121. As I said, to hot 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 about 600,000 bpd and the declines are picking up momentum, so this expectation looks pretty solid.

 

There was an expectation that Russia and OPEC would maintain current levels of production which appears to be the case althrough recent numbers show a bit of a decline in both Russian and Saudi production. Iraq is flat, Nigeria is dealing with militant attackes that have taken a chunk of production off-line and Libya is Libya. As discussed previously the unfolding crisis in Venezuela is having a major impact on production there which is off probably close to 500,000 barrels if not more.

 

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 by about 100,000 to 200,000 bpd this quarter alone.

 

I also said it was a stretch to see Iran add 500,000 bpd by April (or even the end of the year) as they said they would. I will call this a miss as Iranian production appears to have recovered to pre-sanction levels, however they seem to have hit a wall as the billions of dolars required to grow any further are slow to come. So the jury is out there.

 

Overall, the production call appeears to have been optimistic as production is falling more rapidly than expected.

 

Overall Grade B+

 

Activity Levels

I said 2016 was going to be a train wreck and for the first quarter 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 and Q2 was no different with utilization hovering around 5% to 8% before rising a bit in the past few weeks. Note to producers – time to get back to work as at this rate when you flick the lights on in September, half the serrvice sector may have decided enough is enough and left, which of course will result in scarcity of service providers and price spikes. Grade – Yuck.

 

Canadian Dollar

I suggested 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. Good call. The dollar currently rests at about $0.77. End of year is of course another matter – $0.80 to $0.85 – we shall see, but $60 oil should take it there. Grade A

 

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 balalnce sheets, but so far not a rush of M&A in either the service sector or the E&P space. Anecdotally, we also haven’t seen the number of insolvencies we had expected in Canada. Expect this to pick up a bit over the summer as banks quietly pare their exposures. Grade – NA

 

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 result may be the same, the Republican ticket is now fully Trumped so half right but mostly wrong on the GOP side. I still say Hilary wins if only because I cannot allow myself to envision a Drumpf vote going anywhere.

 

Infrastructure Projects Approved

Well, none have been denied yet! Transmountain approved with conditions, Northern Gateway in limbo, LNG awaiting the feds – it’s kinda the same old same old for now.

 

Stock Picks

A couple of star performers and a couple of laggards. I still believe in Mullen and suspect it will gather some steam in the second half. Same for Suncor which is down due to the Fort Mac shutdowns and the significant losses they will incur as a result of that. If there was an “Act of God” out for my picks I might consider it for Suncor, but then again, it is Canada’s blue chip energy company and I like where they are at – so still a keeper.

 

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

 

Last year at this time, for Canada Day I ran a snapshot of Canada’s energy sector to let people know the gospel, drink the koolaid, or whatever. Herewith the same again.

 

Oil

• Canada is home to the third largest reserves in the world behind only Saudi Arabia and Venezuela at 176 billion barrels of oil, the majority of which are located in the oil sands in Alberta (this compares to the United States’ reserves of about 37 billion barrels)
• From this massive reserve, Canada produces a fairly modest 4.0 million barrels per day, especially as compared to the United States current production of about 8.6 and Saudi Arabian production of about 10.3. Regardless, this production ranks Canada 5th or 6th in the world, depending on where exactly Iran sits
• The majority of Canada`s oil is exported into the United States, where Canada is the number 1 supplier of imported oil, having long since supplanted the Middle East, Venezuela and Mexico

 

Gas

• Canada is home to approximately 72 Tcf of proved natural gas reserves, however the estimates for `recoverable`natural gas are much higher, in the order of 1,400 Tcf. On a world-ranked basis, the proved reserves place Canada a distant (17th), but the recoverable reserves place it in the top 5, displacing US proved reserves and making Canada a potential natural gas powerhouse. The majority of the recoverable natural gas reserves in Canada are located in Alberta and British Columbia. These recoverable reserve numbers help make the case for the number of LNG plants proposed for the West Coast.
• Regardless of reserves, Canada is currently the 5th largest producer of natural gas in the world and the 4th largest exporter, with all of these exports heading to the Untied States

 

The message here is that Canada punches well above its weight in terms of energy reserves and production and is well placed to be a major contributor to the world energy mix in the future. Taken a step further, this speaks volumes to Canada’s potential especially relative to US tight oil, specifically where the one is projected to peak and decline by 2020, the other’s reserves have barely been tapped.

 

Prices as at July 1, 2016 (June 24, 2016)

• The price of oil ended the week up after holding tough through the week
  • Storage posted a decrease
  • Production was down
  • The rig count was up marginally
  • Conitnued production declines in the US are helping keep prices up as are the production shut-ins around the world
  • Oil above $50 is not sustainable in the short term. Expect a pull-back for a period of time until the realities of the supply situation in Nigeria and Venezuela become clearer
  • Markets snapped back strongly
• Natural gas rose during the week on bullish weather – almost… at… threee… dollars…

• WTI Crude: $49.21 ($47.60)
• Nymex Gas: $2.987 ($2.662)
• US/Canadian Dollar: $0.7744 ($ 0.7711)

 

Highlights

• As at June 24, 2016, US crude oil supplies were at 526.6 million barrels, a decrease of 4.0 million barrels from the previous week and 61.2 million barrels ahead of last year.
  • The number of days oil supply in storage was 31.9, ahead of last year’s 28.2.
  • Production was down for the week at 8.622 million barrels per day. Production last year at the same time was 9.595 million barrels per day. The change in production this week came from a decrease in Alaska deliveries and a drop in lower 48 production.
  • Imports declined somewhat this week to 7.555 million barrels a day, compared to 7.513 million barrels per day last year. Imports are distorting the storage story.
  • Refinery inputs were up marginally during the week at 16.695 million barrels a day, but strong for this time of year
• As at June 24, 2016, US natural gas in storage was 3,140 billion cubic feet (Bcf), which is 25% above the 5-year average and about 23% higher than last year’s level, following an implied net injection of 42 Bcf during the report week.
  • Overall U.S. natural gas consumption was up 1% during the week with increases across all major sectors
  • A heat wave in California is driving consumption
  • Production for the week was flat but imports from Canada rose to meet demand.
• Oil rig count at July 1 was at 341, up 11 from the week prior.
  • Rig count at January 1, 2015 was 1,482
• Natural gas rigs drilling in the United States was down 1 at 89.
  • Rig count at January 1, 2015 was 328
• As of June 27, the Canadian rig count was at 67 (10% utilization), 42 Alberta (9%), 7 BC (9%), 18 Saskatchewan (16%), 0 Manitoba (0%)). Utilization for the same period last year was about 17%.
• US split of Oil vs Gas rigs is 80%/20%, in Canada the split is 20%/80%
• Offshore rig count was down by 2 to 19
  • Offshore rig count at January 1, 2015 was 55

 

Drillbits

• A Federal Appeals Court ruled that the Goivernment of Canada did not fulfillits consultation obligations with respect to the Northern Gateway Pipeline project, casting more doubt on the project going forward. It is worth noting that the Court also determined that Enbridge, the proponent, more than fulfilled its obligations.
• TransCanada announced completion of the transaction to acquire all of the outstanding shares of Columbia Pipeline Group, Inc. (NYSE: CPGX) (Columbia) for an aggregate purchase price of approximately US$13 billion
• Phase II of the Los Ramones pipeline that flows gas sourced from the Eagle Ford Shale play in Texas into Mexico comes into service today. The pipeline has come online in several phases, with Phase I and Phase II North entering service in 2014 and late 2015, respectively, extending from the U.S.—Mexico border 340 miles south to Villa Hidalgo. Phase II South, scheduled to begin service today, has a capacity of 1.4 Bcf/d and will move gas from Villa Hidalgo to the interconnect of the Tamazunchale pipeline, north of Mexico City.
• Former Vice-President Al Gore’s daughter was among 23 people arrested during a protest of a pipeline under construction, organizers say. The arrests happened Wednesday at the site of Spectra Energy’s West Roxbury Lateral pipeline.
• Drumpf Watch – Drumpf celebrated Brexit, lied about not knowing Hank Paulson, lied about his proposal to ban Muslims, lied about Hillary Clinton approving a free trade deal with South Korea and compared himself to the Founding Fathers.