No, not that super-scary pub in South Calgary and not the awful, awful movie with Natalie Portman.

Rather, a “black swan event” which is typically defined as an event that comes as a surprise, has a major effect, and is often inappropriately rationalized after the fact with the benefit of hindsight.

In the oil and gas sector, there are many such instances where some global event caused a spike or collapse in energy prices that fit this description. Events like the Arab Spring, the collapse of Libya, any of the Arab-Israeli wars, the invasion of Kuwait, the collapse of Long Term Capital Management, the implosion of the Tech Bubble. All of these are events that caused major disruption in global economies and brought about major moves in commodity and asset values. And all were followed by a lot of “totally saw that coming” monents.

Considering the current low price environment and rising geopolitical tensions, it is worth exploring some avenues/areas that might presage a black swan event that may or may not occur (or may already have occurred!) that will have an eventual and long term effect on the energy industry. I will throw a few ideas out there and would be interested in some feedback from the reader group on their views – not because I want to keep the blog short this week (which I do) but because there are a lot of smart people reading this and I value your opinions. Please send me any thoughts on what a potential black swan event that we should be looking for might be or where the most likely place for it to occur is – I wil  share the best (presuming I get any).

• Event: The Fall in Oil Prices
• Effect: A substantial decline in enegy costs leads to a weakening of the envirnmental movement and a realignment of petropower

• Event: The Syrian Civil War
• Effect: Leads to the rise of ISIS, instability in the Middle East, conflict and eventually war between Iran and Saudi Arabia

• Event: An unpopular government is overthrown in Ukraine
• Effect: Russia annexes Crimea. A weak global response emboldens Russia who surreptitiously invades Eastern Ukraine. Further weakness in the response prompts Russia to flex its muscle in the Middle East leading to Cold War type relations with a weak United States who is now stuck with conflicting allegiances to Saudi Arabia, Israel and a newly welcomed back to the global family Iran. The ultimate effect of this is the destabilization of American influence in the Middle East and a decline in projected American power and influence worldwide and a major redrawing of the global strategic map.

• Event: A massive series of bankruptcies in the American oil patch
• Effect: A credit market collapse that triggers a global recession

• Event: Low oil prices persist
• Effect: A coup in Venezuela destabilizes the region, leads to production declines and a spike in global oil prices.

The point here is that it is easy to see how seemingly dissociated events can lead to major economy and geopilitical shifting outcomes. On the other hand, if you dig deep enough, everything can be argued to be such an event but for me, the ultimate lesson is that you need to be aware of what is happening around you to be able to fully appreciate what direction commodity prices may take. Further, in periods of instability, you need to be prepared for the unassociated, unpredictable event that will blow your forecasts and projections out of the water. It also seems that the longer a period of instability persists without such an event, the stronger the warning signs should be that the next one is going to be a doozy (official Back Swan term).

Prices as at October 2, 2015 (September 25, 2015)

• The price of oil followed a similar pattern of weakness up to storage reports, a small rally, a downturn then rallying through the balance of the week to finish marginally up.
  • Storage posted a surprise increase
  • Production was flat
  • Markets reacted positively to the fundamentals
  • The rig count decreased significantly
• Natural gas lost gorund during the week primarily on warmer weather and expected consumption declines due to Hurricane Juaquin

• WTI Crude: $45.64 ($45.53)
• Nymex Gas: $2.465 ($2.562)
• US/Canadian Dollar: $0.7596 ($ 0.7503)

Highlights

• As at September 25, 2015, US crude oil supplies were at 457.9 million barrels, a increase of 3.9 million barrels from the previous week and 101.3 million barrels ahead of last year. Much of the increase was the result of increased imports.
• The number of days oil supply in storage was 28.1, ahead of last year’s 22.3.
• Production decreased marginally to 9.096 million barrels per day from 9.136 with lower 48 flat while Alaska prodcution increased marginally. Production last year at the same time was 8.783 million barrels per day.
• As of September 25, 2015, US natural gas in storage was 3,538 billion cubic feet (Bcf), which is 5% above the 5-year average and about 15% higher than last year’s level, following an implied net injection of 98 Bcf during the report week.
• Overall U.S. gas consumption decreased by 1.2% this week. Hurricane Juaquin is expected to cause power outages and reduce consumption when it makes landfall this weekend.
• Oil rig count at September 4 was down to 614 from 640 the week prior.
• Natural gas rigs drilling in the United States was down to 195 from 197.
• As of September 28, the Canadian rig count was off marginally to 171 (23% utilization), 105 Alberta (21%), 35 BC (44%), 29 Saskatchewan (24%), 2 Manitoba (11%)). Utilization for the same week last year was 50%.

Drillbits

• Premier Rachel Notley of Alberta spent much of the past week in Eastern Canada and New York sowing confusion about her support of the oil and gas industry and her apporahc to carbon pricing indicating both support for the NDP’s redistributive cap and trade proposal and a made in Alberta solution.
• On the same trip, she suggested that the Transmountain Pipeline project might get more support if it moved its terminus from the already in operation Burnaby facility to Richmond, whcih seems kind of silly
• A group of Alberta and BC First Nations announced unanimous support for a Fort MacmUrray to Prince Rupert energy corridor sponsored by Eagle Spirit Energy
• Strike Energy Services announced an investment from, and partnership with, TriWest Capital, A Calgary based private equity group
• PennWest sold Saskatchewan assets for $205 million
• China’s apparent oil demand rose 10.2% in August from a year earlier to 11.19 million barrels per day (b/d), according to a just-released Platts analysis of Chinese government data.
• Shell announced it was abandoning its Arctic exploration efforts after disapppoiunting results in the Chukchi sea. This $7 billion write-off is expected to put a damper in Arctic exploration for a significant period of time
• Canada Election Watch
• New polls show the Conservatives and Liberals pulling ahead of the NDP in the all important Ontario region and a significant pullback of NDP support in Quebec
• Drumpf Watch – just a picture this week