Saturday, November 24, 2018

The math of oil oversupply is far from perfect – wait to confirm the trend

World oil production is severely hampered by years of underinvestment. Now with the so-called ‘Iranian Sanctions’ there should be a supply shortage. Too many factors point to a supply shortage and the thought that all this world-wide shortage can be compensated for by pipeline restricted oil from the Permian seems unlikely.

Canada one of the few countries able to increase oil production is held back by a shortfall in pipeline capacity and an incredibly large and an apparently lasting price discount. As said before companies like CNRL seem to be able to circumvent a lot of the spot market discounts yet even share-prices of this stalwart have fallen dramatically. So has Suncor in spite of large refinery profits. The logic seems to have completely evaporated when it concerns both oil supply and oil & gas company pricing.

Natural gas prices have in NYMEX shot up to over $4 per mcf while AECO prices, again with a steep discount, have clearly improved. Global natural gas prices are nearly $10 higher than NYMEX. What are we missing?  
Venezuela production has crashed. Barring ‘waivers’ by the Trump government Iran Sanctions should bite in the supply.  Saudi is producing at ‘peak capacity’ and Russia is not far off.  With Saudi and OPEC planning a production cut, we should combined with all world instability see oil prices rise!  
What is real and what is not?  I hear stories of hedge fund and political manipulation but one thing seems clear, our oil supply math is far from perfect. In the meantime, federal and provincial politicians are paralyzed and/or indifferent. With bill 69 waiting in the Senate for approval even greater misery is to be expected. The incompetence of the Trudeau government regarding energy policy and small business taxation or the persecution of Admiral Norman is just beyond believe. In the meantime, during these ‘good economic’ times these stooges run a $20 billion deficit. How does that jive with their election promises?  Albertans are literally boiling over in anger and so is Saskatchewan.  Notley is probably out and Kenny is in. But with the idiots in Ottawa I don’t dare to predict – Canada is getting the government it deserves not the one it needs.  The betrayal by Maxime Bernier doesn’t help either. My … (to be PC) what a mess our country currently is.
In the meantime, we’re manipulated in oil and gas pricing on a scale beyond believe, thanks to the U.S. funded killers of pipelines and… oil by rail is going through the roof. An accident waiting to happen? 
I will stick to my back-of-the-envelope estimates. I think we are having a major oil supply shortage that will get exposed as soon as the emerging market funk and the Trump trade wars are out of the way. In 2019, I think the hype of oversupply will be exposed. When the emerging markets recover from a peaking U.S. dollar exchange rate, the world economy will improve and oil prices will go back to $70 if not $80 or even $100 dollars. In the meantime, B.C.’s LNG ports are getting closer to reality and Line3 will approach completion by the end of 2019. Keystone is not far behind and even Trans Mountain may be coming in a year near us (for now we’re hoping 2023). This should gradually reduce the price differential.  By the end of 2019 I would not be surprised to see a lot smaller differential. 

With many trends, look no further than the changing interest rates, the pain always seems to last a bit longer than we expect. But it is not a matter of ‘if’ but rather ‘when’. In the meantime, you may be right, but the market can be wrong longer than your pockets are deep.  As such, don’t back up the truck yet, but rather wait for confirmation of the trend.

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