Every Year Oil Demand Is Up In H2 Vs H1, Expecting +50 Million Barrels Per Month In H2/17

There is a strong logical case for oil hitting $60 before year end if OPEC/non-OPEC extend their ~1.8 million b/d and can manage reasonable (ie. >80%) compliance, even if US oil production continues to grow.  Why? EVERY YEAR, oil demand is ALWAYS up strongly in H2 vs H1.  Every year, oil demand follows a seasonal pattern. The low demand period every year is Q1. Then oil demand starts to pick up slightly in Q2, but the big increases in oil demand are every year in Q3 and Q4.  Oil demand in H2 is expected +~1.7 million b/d, or ~50 million barrels per month of increased oil demand vs H1/17.

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Wider AECO Differentials In Q3, Its Good That The New AECO $2.50 Is The Old AECO $3.25

It looks like the HH less AECO differential will widen this summer, in part due to the NGTL planned outages this summer to expand the system capacity.  This week, NGTL provided its new monthly outage forecast [LINK] and it now looks like every month this summer will have a significant outage in the key region impacting the Montney.  However, it doesn’t look like any additional outages, just a shifting of some of the smaller ~0.6 bcf/d Aug outage into July.  The big NGTL outage is still ~1.8 bcf/d in Aug, then ~0.6 bcf/d in June, and now, with the shift, another ~0.6 bcf/d in July.  These outages are needed to allow NGTL to expand capacity on the key Upstream James River Receipt area that is the core of the Montney growth.       Continue reading “Wider AECO Differentials In Q3, Its Good That The New AECO $2.50 Is The Old AECO $3.25”

Under Construction US LNG Export Projects To Add >2 Tcf Of Incremental Demand In 2017 Thru 2019

Oil price volatility is primarily driven by supply factors (ie. OPEC compliance), whereas Henry Hub (HH) price volatility is primarily driven by demand factors (ie. winter weather).  There are fundamental changes to non-weather natural gas demand that are happening and do not require future changes to have a material demand impact relative to swings in winter weather demand.  Under construction LNG export projects alone are expected to add >2 tcf of demand per year by the end of 2019  (relative to 2016), and this is before increasing pipeline exports to Mexico.  There are no “what if’s” required to keep these non-weather natural gas demand factors on track, which means there should be an outlook of better downside HH price protection in the winter, and better HH prices in 2018 and 2019 compared to the current HH strip of ~$3. The primary risk to better HH prices is a return of strong US natural gas production from natural gas drilling and from associated natural gas from oil drilling.   Continue reading “Under Construction US LNG Export Projects To Add >2 Tcf Of Incremental Demand In 2017 Thru 2019”

Is The White House/Exxon Statement A Signal For No Border Adjustment Tax On Oil And Gas?

It may well turn out to be an excellent CERA week for the Cdn oil and natural gas sector to start the turn in sentiment from negative to positive. The #1 issue for relative underperformance of Cdn oil and gas stocks to the US peers is the fear of Border Adjustment Tax (BAT) including US imports of Cdn oil and gas.  Two events yesterday seem to be more than coincidence.  Yesterday’s White House statement on ExxonMobil (XOM) looks to be a signal pointing to NO BAT on oil and gas.  And XOM’s CERA speech yesterday looks to be the finishing thought or closer to the argument that links the reality of oil and gas logistics to be a key contributor to Trump’s priorities of growth, jobs, manufacturing, and exports.  Continue reading “Is The White House/Exxon Statement A Signal For No Border Adjustment Tax On Oil And Gas?”

We Should Watch: Is Key Energy Right And US Service Costs Will Return To 2015 Levels in 2017?

The who’s who of the energy world are in Houston for CERA week.  The reporting has started and it is on the global view of oil and gas being said by OPEC, supermajors, politicians, and major energy agencies in their speeches or on the sidelines.  But we expect energy followers will walk away with a major impression on something that isn’t a focus of the speeches – the US oil and gas service sector is running at full tilt.  CERA is in Houston, the center of the US oil and gas industry and that means the day to day oil and gas buzz will be evident to anyone. And the buzz of a full speed ahead US service sector will then focus on how much capacity is there to expand, in what time period, and are service prices (costs to the producers) going to break out.

Our March 5, 2017 Energy Tidbits highlighted “the first service sector warning heard to date (by Key Energy) that service sector prices will return to 2015 pricing levels by year end 2017.”  We have not seen other US service companies or producers come out with this bold of a prediction for US service costs, but its worth watching.  If Key is even directionally right, higher service costs on the top plays will ultimately flow thru to all US plays and spill over into Canada.  It will change the assumption of modest service price increases in 2017 and continuing in 2018.  Higher service costs can be absorbed by the higher quality plays, but as always happens in rising costs or declining prices, it’s the lesser quality plays that get hit the hardest Continue reading “We Should Watch: Is Key Energy Right And US Service Costs Will Return To 2015 Levels in 2017?”

Waiting For Trump To Be Specific Now That House Republicans Stress “BAT” Is Critical To Tax Reform

The Border Adjustment Tax (BAT) or no BAT roller coaster continues with today’s CNBC interview with Kevin Brady (Ways and Means Committee Chairman) [LINK], which will bring some BAT worries back on the screen.  The House Republican leadership didn’t waste much time in clearly stating that BAT is a critical element of tax reform and that it will be included in any tax reform, at least from the House Republican leadership side.  So much for the one day BAT relief that we highlighted in our Feb 14 blog on Trump’s comments that he only needed to tweak Canada’s trade relationship [LINK].

The question of BAT can be settled very quickly, one way or another, especially if Trump comes out, as CNBC suggests, with a tweet or a comment specifically saying where he is on BAT.  There is still the Senate (where a number of Senate Republicans are against or at least questioning BAT), but if Trump says he is onside with BAT, the momentum will clearly go in that direction. It would be very interesting to see what happens if Trump comes out with a No BAT position.  As of our sign off at 8pm mountain time, we have not seen any Trump tweet.  Until that happens, we have to wait for his tax reform unveiling sometime in the next couple weeks.

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Trump “Tweak” To Canada Trade Could Carry A “No BAT” Tone For Months

There was a big relief felt at lunch yesterday in Calgary with the Trump/Trudeau press conference, when Trump said the US/Canada has an “outstanding trade relationship, we will be tweaking it, we will be doing certain things that will benefit both of our countries, it’s a much less severe situation than is taking place on the southern border. For many many years, the transaction was not fair to the United States, its an extremely unfair transaction, we are going to work with Mexico, we are going to make it a fair deal for both parties, I think that we are going to get along very well with Mexico, they understand and we understand.”  This is being viewed as a big confirmation for those that didn’t expect to see a House Republican Border Adjustment Tax (“BAT”) enacted that would hammer Cdn oil and gas exports to the US (“No BAT”), and also cause the Yes BAT to at least question their views.  Note we are discussing BAT only related to Cdn oil and gas exports to the US.

BAT is part of the House Republican overall tax reform plan and is a term from the House Republican “A Better Way” tax plan released on June 24, 2016.   This was not a joint House/Senate plan nor a Trump plan, but a House Republican plan.  BAT is only part of the plan, which included the full picture of tax reform items such as corporate tax cuts, personal tax cuts, bring back money from foreign subs, etc.  The BAT language is pretty clear “sales to US customers are taxed and sales to foreign customers are exempt”.  The BAT fears are that all countries are included, including Cdn oil and gas exports to the US would end up being hit by a 20% tax.

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AECO Differentials Impacted By NGTL Outages And REX Expansion

Today’s blog on widening AECO differentials is a followup to last night’s blog “NGTL’s USJR Outages to Impact Q2/Q3 Production, Lack of New Q4 Capacity Expected To Push Back H1 IPOs” {LINK].  NGTL outages impact AECO differentials and we expect to see AECO differentials hurt (widen) this summer with the NGTL outages highlighted in our blog last night.  But we remind that the recent widening AECO differential is also impacted by other factors ie. REX Zone 3 expansion.

AECO differentials have widened in the past few months.  There are a multitude of factors that impact AECO prices relative to HH.  But we believe two of the key factors were the NGTL outages in Nov/Dec 2016, and the startup of REX Zone 3 expansion in early Jan.  The below graph shows the HH less AECO differentials in US$ since Oct 1, and it shows how HH has dramatically outperformed ie. the differential widened.

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NGTL’s USJR Outages To Impact Q2/Q3 Production, Lack Of New Q4 Capacity Expected To Push Back H1 IPOs

NGTL’s Dec forecast for ~1.8 bcf/d outage on parts of their system in Aug should gain attention as producers reflect outages in guidance. The bigger issue for investors is the lack of new egress capacity in Nov/Dec, which is likely to cause many expected H1/17 Montney IPOs to be delayed until they have visible egress for growth..

Our research writes each month on the NGTL monthly outage forecast.  The NGTL system is the Alberta natural gas pipeline system within TransCanada.  The NGTL Dec monthly outage forecast [LINK]  was when we first saw a new planned ~1.8 bcf/d outage in Q3/17.  This was generally overlooked as it came out just before Xmas.   Our weekly Energy Tidbits memo (Dec 25, 2016 memo) highlighted this with an item “Big NGTL curtailments in Q3/17 and Q2/17”.  We further wrote “This week, TCPL/NGTL posted its “NGTL & Foothills Systems Monthly Outage Forecast December”, which is their customer update on receipt capacity by pipeline.  This is essentially a warning report on where receipt capacity is lower than normal, hence where there will likely be gas curtailments.  The primary focus for our review is the receipt capacity on Upstream James River Receipt Area of NGTL, which is the part of the NGTL system that has the biggest impact on the Montney, Duvernay and other multi zone Cretaceous sands.   The good news is that the system is running full this winter.  The bad news is that there are some very big curtailments coming in Q2/17 and even moreso in Q3/17.   NGTL estimates curtailments to hit 0.8 bcf/d in Q2, and ~1.8 bcf/d in Q3/17.  It is also important to note that NGTL says the Q3/17 curtailments will impact both interruptible and firm transportation.”  The Aug outage of ~1.8 bcf/d is 20% of the then 9.2 bcf/d capacity Upstream James River (USGR) Receipt.  The below NGTL map shows the USGR receipt area.

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OPEC’s Higher Dec Production Is Likely To Move More To The Sidelines Until Feb 13

WTI ended down $1.10 to $51.38/b after the late morning disclosure by OPEC on higher Dec oil production volumes.  OPEC’ reported that its OPEC members estimate for Dec oil production was up ~60,000 b/d, instead of down 221,000 b/d as estimated by 3rd parties. It also means that OPEC will need to make bigger cuts to get to its targeted 32.5 million b/d effective Jan 1.   OPEC compliance is the most important near term oil price factor.  The higher Dec production and big variance to 3rd party estimates is likely to move more to the sidelines until the next OPEC MOMR comes out on Feb 13 showing what OPEC members saying they produced in Jan.

OPEC members reported Dec production was up ~60,000 b/d.  OPEC released its Monthly Oil Market Report (MOMR) Jan 2017 this morning, which includes OPEC’s Dec 2016 oi production by country as provided by “Direct Communications” (ie. provided directly by OPEC members) and also by “Secondary Sources” (ie. Platts, EIA, etc).  OPEC members Gabon, Libya, Iran and Qatar did not provide Dec production estimates.  But the remaining 9 OPEC members (Algeria, Angola, Ecuador, Iraq, Kuwait, Nigeria, Saudi Arabia, UAE and Venezuela) estimated Dec oil production was ~60,000 b/d higher than Nov.  Using Secondary Sources for Gabon and Libya (these countries do not report monthly data directly to OPEC) and Iran and Qatar being flat in Dec to their Nov estimates, then total OPEC production in Dec was 34.358 million b/d, up 83,000 b/d from 34.275 million b/d in Nov.

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