OPEC?!?!?!?! What? These guys again? Seriously? It’s hard to believe that we are here yet again. I mean wasn’t it just like last month that we went through the wringer? But that was just the opening act.

 

That’s right, it is time for the semi-annual emotional flogging that most of us in the energy industry know as the OPEC General Meeting. It was a scant two years ago that OPEC gathered amidst the gathering storm clouds that was a secular decline in oil prices due to a rising US dollar, ample production and the removal of Quantitative Easing and took a baseball bat to the collective skulls of the energy sector by removing their production caps, promptly setting the energy industry into a tailspin, crushing drilling activity and capex, plunging energy dependent nations into recession and basically doing all the nasty stuff that we have been covering ad nauseum for the past two years.

This, of course continued for about a year until someone in the Saudi government decided to take a close look at what was actually happening and realized that not only were they burning through pretty much every dollar of reserves they had, but that the basic strategy they had been pursuing was in fact a colossal miscalculation and failure.

So, we have had to endure over the course of the last 11 months the painful attempts at readjustment in the OPEC world to a) use their influence in the global market to restore some sanity to prices and b) ensure their existential survival as a cartel as well as nation states.

First it was the freeze, then it was the pause, the cap, the cut, the Charleston, whatever.

Well now it’s sh** or get off the pot time.

After raising expectations so high at the last meeting in Algeria where they announced a plan to establish soft ceilings on output, the world waits with bated breath as this rag-tag gathering of tin-pot despots (sorry, I have to keep using that expression) tries their golly-gosh darndest to herd cats and get everyone, someone, a couple of them to agree to cut production by about 5% in order to stabilize prices.

What’s at stake? Well depending on who you talk to, very little or a whole lot. The speculation is that a deal sets a floor of $50 under prices and allows the market to recover and all the US tight oil guys to go out and make swiss cheese out of the Permian. Leaving without a deal pulls the pin on the current price rally, likely sending oil prices back sub $40, at least until the next OPEC meeting, if there is even a reason to hold one again (which of course there will be – the Head Office is in Vienna, one of the nicest cities in the world).

Look, I’m getting as tired of writing about this stuff as you are in reading about it. I did the analysis in the run-up to the Algeria meeting and I think the logic still holds. Saudi Arabia needs to cut to avoid a crioppling recession and the deep social unrest that comes with having more than 30% of your male population between 18 and 30, madras educated, unemployed and angry.

So in the interests of time, here is the bestest, sure-fire way to figure out what is likely to happen come November 30th:

• First, take a coin, flip it 100 times and write down how many times it hits heads or tails. Throw the coin out the nearest window. Come to think of it, throw your wallet out the window too.

• Now take a deck of cards and pull out a card. Write down what card it was. Do you have it memorized? Good.

• OK, now add 33 to 11, add 2, subtract 1, add 5, divide by 10 and add 28. Write down the result.

• Now think of a country that starts with the letter R and one that starts with the letter S and write them down. Good.

• Finally, take a hammer and smash your thumb with it. Did it hurt? Of course it did. Why would you do that? Why would I make you do that?!?!?!? And why did I make you throw money out the window? Mostly because I’m a jerk and I like making people do to themselves what OPEC has been doing to the energy sector and themselves for two years.

So, what now? Are you any closer to knowing what will happen? Didn’t think so, but on the bright side, you have a broken thumb from a self-inflicted wound and you’re broke because you threw your money out the window!

Congratulations, you’re OPEC!

But wait, you do have a piece of paper…

And written on that piece of paper is Russia, Saudi Arabia, 33, Joker (it was a stacked deck) and 50/50. So…

• There’s a 50/50 chance that even though it is guaranteed that Russia will cheat, Saudi Arabia will nevertheless be able to coerce a 33 million barrel a day quota out of all these jokers.

Congratulations, you’re Goldman Sachs!

All kidding aside, at this stage, that is probably as easy a way to do this as driving yourself nuts watching the coverage and reading the pundits. And it’s as likely a scenario as any!

Ultimately, higher oil prices are in every producers’ best interests and the best way to achieve that is by cutting production through a coordinated action. The hard part is figuring out who needs to cut what by how much and you can tell everyone is jockeying for relative position by how much they are over-producing (over-reporting more likely) in the run-up to this meeting.

But make no mistake, Saudi Arabia wants higher prices and they typically get what they want. Expect a deal. Likely somewhere along the lines of what you wrote down on your paper. It won’t be “take it to the bank” and it will have hair and escape clauses and lack of enforcement and will be useless and everyone, particularly Russia, will cheat, but it will give cover for the Saudi block to cut back their own production and play by the rules, for now.

So I am mildly constructive.

It’s getting tougher to see my year end $60 oil forecast coming to pass, but I wouldn’t bet too much against it.

By the way, I am truly sorry about your thumb.

Happy Thanksgiving to all my American readers.

Prices as at November 25, 2016 (November 18, 2016)

• The price of oil ended the week up on mixed signals as the continued US dollar rally battled OPEC sentiment to establish a foothold. Expect more volatility until the end of month OPEC meeting.
  • Storage posted a modest and unexpected decrease
  • Production rose by a rounding error
  • The rig count in the US and Canda continues to grow
• Natural gas was up during the week on choppy and uncertain news

• WTI Crude: $46.06 ($45.69)
• Nymex Gas: $3.085 ($2.843)
• US/Canadian Dollar: $0.7398 ($ 0.7406)

Highlights

• As at November 18, 2016, US crude oil supplies were at 489.0 million barrels, a decrease of 1.3 million barrels from the previous week and 33.0 million barrels ahead of last year.
  • The number of days oil supply in storage was 30.7, ahead of last year’s 30.5.
  • Production was up for the week by 9,000 barrels a day at 8.690 million barrels per day. Production last year at the same time was 9.165 million barrels per day. The change in production this week came from marginal decreases in Alaska deliveries and a small increase 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 fell from 8.423 million barrels a day to 7.578, compared to 7.333 million barrels per day last year.
  • Refinery inputs were up during the week at 16.397 million barrels a day
• As at November 18, 2016, US natural gas in storage was 4,045 billion cubic feet (Bcf), which is 6% above the 5-year average and about 1% higher than last year’s level, following an implied net withdrawal of 2 Bcf during the report week.
  •  Demand and production data was not available due to the US Thanksgiving holiday
• As of November 21, the Canadian rig count was at 161 (24% utilization), 101 Alberta (22%), 17 BC (22%), 39 Saskatchewan (34%), 3 Manitoba (20%)). Utilization for the same period last year was about 25%.
• US Onshore Oil rig count at November 23 was at 474, up 3 from the week prior.
  • Rig count at January 1, 2015 was 1,482
• Natural gas rigs drilling in the United States was up 2 at 118.
  • 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

• The Canadian Association of Oilwell Driliing Contractors released their forecast for 2017 and projected 4,665 wells drilled in Canada for the year, up from an estimated 3,562 in 2016
• The Federal government is expected to rule on two Enbridge pipelines today, the Line 3 Replacement and whether to extend the Northern Gateway sunset clause. As at this writing, neither annoucenment had been made
• Wolfcamp revisited – Last week we mentioned the “20 billion barrels of oil” in the Wolfcamp formation of the Permian Basin, estimated by the US NGS and trumpeted by the media as a $900 billion windfall. As you recall, there was some skepticism on my part and I feel somewhat vindicated as one of my favourite analysts took the data and crunched the numbers and figured that in order to get this $900 billion, in the current pricing environment oil and gas companies would have to spend $1.4 trillion in drilling costs, royaltoes, taxes and other operating costs – a cool $500 billion in negative operating cash flow. That said, financial markets will keep piling in, as the expression goes – I’ll keep drilling until you run out of money.
• OPEC meeting – Yes, there is an OPEC meeting happening next week somewhere. In case anyone cares
• NDAP – the North Dakota Access Pipeline protests continue to escalate as helicopter protestors funded by anti fossil fuel organizations continue to agitate on this until the next cause comes along, hopefully somewhere warmer – ’cause North Dakota ain’t anything like Cali, don’t you know. It is increasingly clear that the Obama administration has zero desire to address this conflict of protest vs rule of law and contractual rights and prefers to see conflict and possible injury rather than risk its environmental legacy by enforcing an approved project through. Eight years of leadership and then a punt – Obama is now the Cleveland Browns
• Saskatchewan is projecting a $1 billion deficit as low commodity prices take their toll
• Rather than just leave things alone, the Alberta NDP has decided to completely revamp the electricity sector, another major change to the economy that was, wait for it, not in the platform.
• Drumpf Watch: The Donald is hard at work doing something. After a week of lecturing and coddling the media, making stellar appointments such as Ben Carson for Housing and Urban Development, Donald took a well-deserved vacation to his Florida resort Mar-A-Lago, presumably to give thanks for being elected President, or more likely, convene a private family meeting to ask “What the F happpened here? How could I have won? This is not the marketing gimmick I wanted! You are all fired!”.