So here we sit in week 2 of the Fort McMurray crisis and, at the risk of having someone take a swing at me, it would appear that notwithstanding the ongoing crisis, things are at least settling down a bit.

The fire as it stands is under some measure of control and the weather appears to be cooperating. Donations of money and goods continue to pour in for evacuees and the province is mobilizing to get funds to those displaced, insurance companies are starting claims processes and infrastructure companies are hard at work restoring vital services so that residents can return. While the timing on that return is uncertain (at this point it seems at least another two weeks), it would appear that its eventuality is a given.

As well, most of the major myths surrounding the fire appear to have been busted, including the following more absurd ones:

• Eco-terrorists did not start the fire
• The as yet to be implemented NDP budget cuts are not responsible for allowing the flames to spread
• Air Canada did not intentionally raise prices to gouge customers
• The Red Cross is not handing donations over to Syrian refugees (where does this stuff come from?)
• Russia cannot do a better job than Canada at putting out the fire
• And the best for last, a rogue ISIS cell did not start the fire

Also, finally, we have had the long awaited Prime Ministerial visit to Fort Mac (today actually). Having endured a week of being hectored and ridiculed on social media, the PM has finally gotten word from fire officials that the distraction of a visit is at a manageable level. Much has been made either way about this – it must seem to young master selfie that he is living in a Clash song (If I go there will be trouble, If I stay there will be double, so you gotta let me know, should I say or should I go).

Against this backdrop we have the industry story which is the shut-in production. With more than 1 million barrels a day of production shut-in, it is estimated that the Canadian energy industry is losing $70 million a day between foregone revenue and fixed costs. Companies are hard at work, but it is believed that it could take a couple of weeks longer for production to get back up to previous levels.

Although strangely, traders for most part appeared to be relatively sanguine about this supply shock (because that is what it is) until, lo and behold, a surprise US inventory draw on Wednesday (which is for the week ended May 6th so it doesn’t even include the effects of the shut-in) caused everyone’s heart to skip a beat.

Canadians can be forgiven for feeling a little slighted by all this – after all, the two and half day Kuwaiti supply shock that happened after the Doha freeze meeting moved the price by $5, but our weeks long shock barely moves the needle. Oh well.

From a broader energy space perspective though, this outage and Kuwait combine with other outages and declines around the world to tell a bit of a story. Consider the following:

• Nigeria – off shore platforms shut down and evacuated due to terrorist threats, terrorist organizations bombing pipelines, as previously discussed close to 500,000 bpd off-line pushing production to the lowest in two decades
• Libya – warring factions have cut the country in two and in effect completely neutered production there which has fallen from 1.6 mm bpd under Qadaffi to just over 200,000 bpd currently.
• Venezuela – production has declined 200,000 bpd in the first quarter and may fall a further 500,000 bpd to 2.1 mm bpd. The only question is what comes first – sovereign default or production below 2 million bpd.
• The United States has seen production decline by 600,000 from its peak in April last year and virtually all this production decline has been in the shale space.

In addition, several recent news items point to an accelerating decline in production that is both short and long term in nature, with a particular concern on the longer term side of things. For example:

• In the US, oil and gas bankruptcies now total 69 since early 2015 as 18 companies filed for bankruptcy in the last two months. A Canadian company holds top honours as the biggest so far but there are more to come.
• According to IHS, new oil and gas discoveries have dropped to their lowest level in six decades. The oil industry only found 2.8 billion barrels of oil and petroleum liquids in 2015, the lowest total since 1954. While a lot of this can be attributed to low prices and capex cuts, the trend has been developing over a number of years. While the impact won’t be felt for many years, the capital and time required to catch up could be significant. Wood Mackenzie estimates that the world could see a supply shortfall of 4.5 million barrels per day by 2035 if the industry does not pick up the pace of new discoveries.

Yet with all this, the market was fixated on the removal of long-time (and 80 year old) Saudi oil minister Ali al-Naimi who was replaced by the former chief of Saudi Aramco, Khalid al-Falih. While the shake-up was expected at some point, the timing was not. That said, nothing is likely to change in current Saudi strategy and much airplay was given to Aramco statements that they are going to see “significant” production growth in 2016, of about 250,000 bpd which as any Nigerian can tell you is nothing more than a ruptured pipeline.

So, with no real change on the Saudi side of the equation, and nothing but supply side risk on the other side of the equation, I suppose it’s worth asking:

• Are these short term production outages the “black swan” and a signal that long term production and supply risk is not getting enough attention? It’s worth noting that these “unplanned outages” continue to increase as can be seen in the chart to the right, which does not include Fort Mac shut-ins.

Special Naming Contest Update!

OK – week 2 of the contest.

As per last week, I have been informed that it is time that this blog had a more “zippy” name than Weekly Update and Energy Musings, as it is boring, and neither hip not cool.

So I am going to open it up to you, the reader, to help pick a name.

I will take the top 3 submissions and share them with you (hopefully next week) for a vote and pick the winner. Up for grabs for the winner is a bottle of whiskey (of my choosing, don’t worry, I have excellent taste) and, of course, all the accolades and imagined immortality that comes from choosing the name of a blog with a narrow and targeted distribution.

So far I have only 2 suggestions.

Prices as at May 13, 2016 (May 6, 2016)

• The price of oil ended the week down
  • Storage posted a surprise decline
  • Production was down again
  • The rig count fell, but appears to be bottoming out
  • Conitnued production declines in the US are helping keep prices up as are the production shut-ins around the world, but negative noise out of Saudi Arabia and Iran is capping any rally
• Natural gas fell marginally during the week

• WTI Crude: $46.27 ($44.58)
• Nymex Gas: $2.096 ($2.101)
• US/Canadian Dollar: $0.7730 ($ 0.7731)

Highlights

• As at May 6, 2016, US crude oil supplies were at 540.0 million barrels, a decrease of 3.4 million barrels from the previous week and 55.2 million barrels ahead of last year.
  • The number of days oil supply in storage was 33.7, ahead of last year’s 30.1.
  • Production was down again for the week at 8.802 million barrels per day. Production last year at the same time was 9.371 million barrels per day. The decrease in production this week was mixed as a recovery in Alaska deliveries was offset by a major drop in lower 48 production.
  • Imports were flat during the week
  • Refinery inputs were up marginally during the week
• As at May 6, 2016, US natural gas in storage was 2,681 billion cubic feet (Bcf), which is 44% above the 5-year average and about 44% higher than last year’s level, following an implied net injection of 56 Bcf during the report week.
  • Overall U.S. natural gas consumption data was unavailable during the week
  • Natural gas prices represented by the AECO spot price in Canada collapsed last week to $0.55 an mcf due to the shut-in of oil sands facilities which consume about 25% of Alberta gas production to generate steama nd electricity for their processing
• Oil rig count at May 13 was down to 318 from 328 the week prior.
  • Rig count at January 1, 2015 was 1,482
• Natural gas rigs drilling in the United States was up 1 at 87.
  • Rig count at January 1, 2015 was 328
• The collapse in the US rig count is likely over with most of the damage already being done
• As of May 9, with break up in full force, the Canadian rig count was at 34 (5% utilization), 23 Alberta (5%), 6 BC (8%), 5 Saskatchewan (4%), 0 Manitoba (0%)). Utilization for the same period last year was about 10%.
• US split of Oil vs Gas rigs is 80%/20%, in Canada the split is 20%/80%
• Offshore rig count was at 22
  • Offshore rig count at January 1, 2015 was 55

Drillbits

• Earnings season is here! Earnings season is here! A few reports of note.
  • Enbridge reported net income for Q1-16 of $1,213 milllion, available cash flow from operating activities was $1,114 million
  • Crescent Point reported funds flow and net loss in Q1-16 of $378 million and $87.5 million respectively compared to $433.6 million and a loss of $46.0 million in Q1-15
• According to Bloomberg, six of the largest oil and gas companies in the world have issued a whopping $37 billion in bondds so far this year, about double the amount issued in the period before oil prices started to fall. Since these companies aren’t generating the cash flows they once were, they are using cheap debt and improving sentiment to pump up their cash reserves and pay dividends
• Drumpf Watch – The Republican Party establishment, while still split, seems to be slowly coalescing around Donald Drumpf, although a significant and influential faction remains solidly anti-Drumpf or #nevertrump as per Twitter. With Paul Ryan reluctantly agreeing to “work with him” and no less then T. Boone Pickens endorsing his kooky anti-Muslim, anti-immigration policy, it seems that Drumpf may be unstoppable! Until the election that is. In another interesting note, Drumpfs former butler is being investigated by the secret service for online posts threatening the life of Barack Obama. And why won’t Drumpf release his tax returns? Tax shelters? Off-shoring income?