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The Oil Sands Weekly

The Oil Sands Weekly

North Saskatchewan River water samples look promising . . . 

Husky Energy has made a $5 million payment "in good faith" to the city of Prince Albert, Saskatchewan. The city invoiced Husky $2.5 million and says it will incur costs of $2 million per month to maintain its water bypass lines.

Water samples taken from the North Saskatchewan River so far all meet Canada's drinking water standards. However, some samples exceeded the Canadian Protection of Aquatic Life Guidelines. Saskatchewan's Water Security Agency expects water intake valves into the city's water treatment facilities can be re-opened in the next few weeks.

About 150,000 of the 250,000 barrels spilled into the river are reported to be recovered so far.

CNRL pleads for a tax break, or else . . . 

Canadian Natural Resources (CNRL) has been busy asking municipalities for 30% reduction in its property taxes. The company says its property tax bills have increased 500% more than oil revenues since 2004. Most municipalities have been less than receptive and have already rejected the company's request.

CNRL has already shut-in 1,700 wells and 50 natural gas compressors since oil and gas prices began falling in the past 2 years. The company says it plans to shut-in another 600 wells and 20 natural gas compressors by the end of the year.

Vancouver mayor makes final plea to kill Trans Mountain Expansion . . .

Kinder Morgan is being subjected to yet another round of public consultations on the proposed Trans Mountain Expansion, this time being organized by a 3-member panel appointed by the Minister of Natural Resources, Jim Carr. The group has organized a series of town halls in 10 communities across BC and Alberta, which is now in its final stretch in BC's Lower Mainland, where it faces the most opposition.

This round of reviews is intended to engage with "local communities and Indigenous peoples" and review feedback on the project. Vancouver Mayor Greg Robertson and various special-interest groups are making one last plea to kill the pipeline, insisting just one spill could decimate Vancouver's economy and reputation.

Robertson says he has faith that his close friend Justin Trudeau will make the “right decision” at the end of the day and reject the pipeline expansion. The mayor is confident the government can find other ways to support Alberta's economy.

The panel admits that Canada's transition to a low carbon future will be challenging. Feedback so far from opponents are that the National Energy Board (NEB) didn’t adequately assess spill or climate change risks and that First Nations’ consultations have been inadequate. The group insists they do not have a particular view on the project but have instead been tasked with determining if the NEB did an adequate job. The panel's recommendations to the federal government are non-binding.

Yet another government review panel assembled . . . 

Still on the subject of review panels, Canada's Minister of Environment and Climate Change Catherine McKenna has assembled a 4-member Expert Panel, this time to review the federal environmental assessment process.

The panel is tasked with ensuring "that decisions on major projects are based on science, facts, and evidence, including traditional knowledge of Indigenous Peoples."

The panel members include Rod Northey, an environmental lawyer, Doug Horswill, former VP of Teck Resources, Johanne Gélinas, a climate consultant and Renée Pelletier, an Aboriginal rights lawyer. Minister McKenna, who is also a lawyer by trade, was criticized for her selection of Northey, who happens to be a Liberal party donor. 

Consultations will be held across Canada, beginning in September.

Alberta's carbon cap and future oil sands growth . . . 

The Fraser Institute published a scathing report this week, suggesting the NDP government's 100 million tonnes/year carbon emissions cap will kill growth in the oil sands and dramatically slash government revenues.

At current emission intensities, the authors estimate the cap will be reached by 2024, or at best 2026 with improvements in technology. The Fraser Institute estimates the losses in production will be in the range of $150 billion to $250 billion by 2040. However, the agency failed to calculate the economic fallout from lost capital investment in the province's energy patch.

Earlier this month, the provincial government set up an Oil Sands Advisory Committee to figure out how it will implement its Climate Leadership plan without destroying the province's economy. The committee's first progress report is due in early January. 

Alberta's energy patch versus Ontario's auto sector - comparing apples to oranges . . . 

The Canadian Press released details of a memo prepared for the Federal Labour Minister attempting to explain why Ontario's auto sector deserved its $13.7 billion bailout in 2009 but the country's energy sector shouldn't get a penny. The memo points out that:

  • Access to cash was not available in 2009, which was hurting both the auto manufacturers and those trying to purchase new cars. This is certainly not the case in the current oil crash.
  • The whole auto sector was at risk of closing up shop in Canada, which the authors believe is unlikely to ever happen in the energy patch.

The Canadian Press reported that the memo was drafted in response to those who "have advocated a similar type of assistance be made available to support the oil and gas industry". However, it is unclear who those advocates are, since no oil company has yet asked the federal government for a bailout.

What has been asked repeatedly is better access to global energy markets, fewer roadblocks and more clarity on regulations.

Over 37,000 jobs were lost in the auto sector from 2007 to 2012. In contrast, the energy patch has lost 52,570 direct jobs since the beginning of 2015. CAPP estimates the number of indirect job losses to be over 100,000 across the whole oil & gas sector.

BC Liberals unveil Phase 2 of Climate Leadership Plan . . . 

BC Premier Christy Clark finally unveiled details of the second phase of the province's Climate Leadership Plan, which had been delayed from this past spring.

The government announced a number of initiatives including more subsidies for electric cars and commercial vehicles that use compressed natural gas, reforestation, several infrastructure projects and new agricultural initiatives. The province has also brought their methane emissions targets inline with Alberta.

BC aims to reduce its emissions to 25 million tonnes/year by 2050.

Many lobby groups expressed disappointment over the government's failure to increase the carbon tax, which began at $10/tonne in 2008 but has been frozen at $30/tonne since the last election. Many have also questioned Clark for her support of LNG, since those facilities are significant GHG emitters and will make it impossible for the province to meet its targets.

Clark pointed out that BC also has a very high cost of living, with many families struggling to make ends meet. BC's Lower Mainland already has the highest gas price in North America thanks in part to hefty public-transit taxes. 

Emissions in the provinces have been rising since 2012 due to population growth and an improved economy. The premier also called on the rest of Canada to "do their part" in reducing the country's emissions.

The full cost of the Climate Leadership Plan will be unveiled at the next provincial budget. BC's carbon-tax is advertised as being revenue-neutral, as proceeds from the program (if any) get redistributed to low-income families.

TransCanada trying to make Canadian gas more competitive . . .

TransCanada is offering a 42% price-cut on its natural gas tolls from Western Canada to Ontario provided enough producers sign-up for a 10-year contract. The company says the move is intended to make gas produced in BC and Alberta more competitive with shale gas produced in the Montney and Duvernay basins, which is flooding into southern Ontario and displacing Canadian gas. At this point, TransCanada is just assessing if there is sufficient interest in the plan before going ahead with open season.

This week's Canadian economic data . . . 

Equifax reported a sharp jump in Q2 delinquency rates in Alberta and Saskatchewan, however, the relative numbers remain low. The delinquency rate in Alberta is 1.4%, up 40% y/y, while the rate in Saskatchewan is just 1.2%, up 23% y/y. The Canadian delinquency rate rose to 1.1%, up 4% y/y. The total Canadian debt load (including mortgages) rose 6.3% to $1.66 trillion in the second quarter.

The Conference Board of Canada's Composite Leading Index increased by 0.9 points to 109.1 in June, suggesting slightly improved business confidence. The group credits higher oil prices, an increase in commercial building permits and signs of an improving labour market as reasons for optimism.

Across Canada, the number of people collecting Employment Insurance (EI) in June was relatively unchanged from May. EI recipients declined slightly in Alberta (-0.8%), driven by declines in Edmonton (-2.7%) and Calgary (-0.6%). The Fort McMurray/Wood Buffalo area gained another 3.5% in June after a sharp increase in May due to the Alberta wildfires.

Retail sales fell 0.1% in June, much worse than the 0.5% gain economists were expecting. Excluding auto sales, retail sales fell 0.8%. Declines were observed across all sectors, except auto and gasoline sales. Retail sales in Alberta fell 0.4%, the second consecutive monthly decline.

July's Consumer Price Index fell to +1.3% y/y, down slightly from a 1.5% gain in June. Excluding declines in gasoline prices, the CPI was up 1.9% y/y. July gasoline prices are down 14% from the previous year. Alberta's inflation rate was 0.7% in July, driven lower by falling electricity and rent prices. Core CPI (which excludes food and energy costs) was unchanged at 2.1% last month.

Canada's manufacturing sales rose 0.8% in June, reversing declined from prior months. Gains were led by higher sales of machinery and transportation equipment products. In Alberta, sales rose 1.8% to $5.2 billion in June, reflecting increases in chemicals, food, petroleum and coal products. This was the third gain in four months. Inventories of energy products (including coal) rose 3.5%, reflecting higher levels of finished products (+14.0%).

For the month of June, 118 manufacturers reported their business was adversely affected by the Fort McMurray's wildfires and evacuations (down from 194 manufacturers in May). The three provinces most affected were Alberta (41), BC (25) and Ontario (22), the three largest suppliers of equipment to the oil sands.

This week's notable global energy news . . . 

Exxon Mobil has cut production at its Baton Rouge refinery due to record flooding in the state of Louisiana. The Baton Rouge refinery is the fourth largest in the US with a crude processing capacity of over 500,000 bbl/day. The flooding has raised concerns over critical energy infrastructure in the state, including pipelines, terminals, salt caverns and above-ground pumping stations. At least 11 people have died and 40,000 homes are estimated to have been damaged so far. Exxon has donated US$500,000 to flood relief efforts in the state.

Still in Louisiana, a fire broke out in a processing unit of Phillips 66's 260,000 bbl/day Lake Charles Refinery. The fire started when a heater tube failed as a hydrogen unit was being shut down. No injuries or production disruptions were reported.

Billionaire activist investor Carl Icahn wrote a letter to the US Environmental Protection Agency (EPA) warning that some independent refiners could go bankrupt. The letter was in reference to renewable identification number (RIN) credits, which can make up a huge part of a refiner's operating expenses. Oil refiners and importers are required to prove compliance with the renewable fuel mandate by either blending biofuels or buying RIN credits from companies that are in compliance. Independent refiners that do not have blending or retail outlets are the most adversely affected. Icahn maintains that RIN credits benefit Big Oil the most and risk putting small independent refineries out of business. Icahn owns 82% of Texas-Based CVR Energy, which operates refineries in both Oklahoma and Kansas.

The EPA and Department of Transport (DOT) announced more aggressive emission reduction targets for pick-up trucks and tractor trailers this week. This second and final phase of emissions standards are part of President Obama’s Climate Action Plan. The guidelines are expected to be fully implemented by 2027. The Canadian government says it will consult with Canadians and announce an alignment with the new US standards by the end of this year.

Reuters is reporting that Enterprise Product Partners has been in talks with Williams Cos on a potential merger. A deal between Energy Transfer and Williams fell apart only a few months ago on concerns of rising debt loads. Williams also slashed its quarterly dividend from US$0.64 to US$0.20 per share. The cut was announced after the markets closed on Friday.

Bloomberg reported that Exxon Mobil, Chevron and Hess have partnered up to bid for drilling rights in the Perdido area in the Gulf of Mexico. Mexico is hoping to raise US$44 billion from its first-ever sale of deepwater drilling rights. The country is allowing foreign crude producers to operate in Mexico for the first time since 1938, in an effort to reverse an 11 year production decline. About 76% of country’s oil reserves are located offshore in deep waters.




US IMPORTS OF CANADIAN CRUDE
million bbl/day • preliminary data by EIA
US OIL INVENTORIES
million bbls • data by EIA

US OIL PROD'N & RIG COUNT
million bbl/day • data by EIA & Baker Hughes

3,302k
+445 ▲ 15.6%
BBL/D CDN IMPORTS TO US
8,597k
+152 ▲ 1.8%
BBL/D US PROD'N
521.1M
-2.5 ▼ 0.5%
BBL US INVENTORY
406
+10 ▲ 2.5%
US RIG COUNT
CHANGE WK/WK  

The US Energy Information Administration (EIA) reported that imports of Canadian oil rose sharply last week, gaining 445,000 bbl/day (+15.6% w/w). Imports from Mexico also rose while imports from Kuwait, Nigeria and Ecuador declined sharply. Overall for the week, US imports of foreign crude rose 211,000 bbl/day to an average of 8.2 million bbl/day.

For the first time since January, production from the lower 48 states rose 100,000 bbl/day. Production from Alaska also increased by 52,000 bbl/day. However, the EIA noted the sharp increase was caused by a "rebenchmarking" of data. Alaskan output has also been erratic in the past two months due to shutdowns and maintenance work.

Natural gas inventories rose 22 billion cubic feet in the US, slightly less than was expected. Inventories in Canada also rose less than expected. Western Canadian AECO spot prices for natural gas are trading below $0.50/GJ, down about 75% from the highs of August 4. The sharp drop is due to congestion on pipelines which run from western to eastern Canada. However, September contract prices for AECO are much better (closer to $2/GJ) indicating the problem is temporary.




CURRENCIES • WEEKLY CLOSE
Friday close • data by Bank of Canada & ICE

94.48
-1.20 ▼ 1.3%
USD INDEX
77.78
+0.63 ▲ 0.8%
CDN DOLLAR
1.58%
+0.07 ▲ 4.6%
US 10Y Bond
1.08%
+0.07 ▲ 6.9%
CDN 10Y Bond
CHANGE WK/WK  

The US Federal Reserve telegraphed a series of mixed messages, dragging the US dollar down 1.3% for the week. The number of Americans filing for unemployment benefits fell more than expected last week, supporting views that the labour market is strengthening. The US labour market is now considered to be at or near full employment. However, US inflation data remains quite subdued due to falling gasoline prices.

Most major currencies rose this week (including the Canadian dollar) due to the weaker USD.




OIL PRICES • WEEKLY CLOSE
Friday close, USD/bbl • data by CME Group
50.88
+3.91 ▲ 8.3%
BRENT USD/BBL
48.52
+4.03 ▲ 9.1%
WTI USD/BBL
45.32
+4.59 ▲ 11.3%
CDN LT USD/BBL
33.97
+4.03 ▲ 13.5%
WCS USD/BBL
CHANGE WK/WK  

 

Western Canadian Select (WCS) is up 37% since August 2 while West Texas Intermediate (WTI) has gained 23% for the same period. This week's gains were credited to continued optimism of an OPEC production freeze and short covering in the oil markets. Bank of America Merrill Lynch predicts that crude will rise to US$69 a barrel by next June.

Despite falling US production and increasing output from the Middle East, the spread between Brent and WTI has widened to over US$2/bbl. 




ENERGY SECTOR PERFORMANCE
Friday close • data by TSX & NYSE

CANADIAN & US EQUITIES
Friday close • data by TSX & NYSE

SECTOR SUMMARY
Friday close • data by TSX & NYSE
TSX ENERGY STOCKS • WEEKLY CHANGE
NYSE ENERGY STOCKS • WEEKLY CHANGE

Warren Buffett's Berkshire Hathaway reduced its stake in Suncor Energy (TSX:SU +0.3%) by 25%, dumping 7.7 million shares in the second quarter. The company increased its stake in refiner Phillips 66 (NYSE:PSX -0.2%) by 3.2 million shares to 78.8 million. Berkshire's holdings in Kinder Morgan (NYSE:KMI +5.7%) was unchanged at 26.5 million.

Enerflex (TSX:EFX +10.5%) has announced $100 million bought deal financing. Proceeds will be used to fund the company's 2016/17 capital program.

Canadian Energy Services (TSX:CES +16%) announced the sale of $19.3 million in equity financing. CES recently announced the purchase of production and specialty chemical business assets of Catalyst Oilfield Services.

Chesapeake Energy (NYSE:CHK +21.3%) has issued US$1.5 billion of new debt, which will be used to retire higher interest bonds. Chesapeake stock was the best performer in the US energy sector this week.

UK-based Pentair has sold its valves & controls division to Emerson (NYSE -1.8%) for US$3.15 billion. The transaction is subject to regulatory approval. Emerson is a major supplier of process controls and automation systems to the oil sands and global energy facilities in general.

Oil field service company Basic Energy Services (NYSE -6.3%) reported it will utilize the 30-day grace period with respect to an US$18.4 million interest payment due in 2019. The company said it will negotiate with debtholders regarding alternatives but believes that it has ample liquidity to continue day-to-day operations.

This week's 52 week highs on the TSX include TransCanada (TRP), Canadian Natural Resources (CNQ), Encana (ECA), EnerFlex (ERF), Peyto Exploration (PEY), Vermillion Energy (VET), Penn West Petroleum (PWT), Parkland Fuel Corp (PKI), NuVista Energy (NVA), Advantage Oil & Gas (AAV), Crew Energy (CR) and EOG Resources (EOG).

On the NYSE, Halliburton (HAL) and Schlumberger (SLB) hit new 52-week highs.

Several US markets (namely the Dow, S&P500 and NASDAQ) hit another record high on Monday before pulling back later in the week. Energy was the best performing sector on the S&P500 this week.

UPGRADES

  • Inter Pipeline (TSX:IPL): Upgraded from Hold to Buy at TD Securities. 
  • Kinder Morgan (NYSE:KMI): Upgraded from Equal Weight to Overweight at Morgan Stanley.
  • Marathon Oil (NYSE:MRO): Upgraded from Neutral to Buy at Bank of America.

PRICE TARGET CHANGES

  • Inter Pipeline (TSX:IPL): Price target increased from $27 to $29 at Scotiabank and from $29 to $30 at CIBC.
  • Teck Resources (TSX:TCK.B): Price target increased from $17 to $21 at Dundee Securities.
  • Trican Well Service (TSX:TCW): Price target decreased from $3 to $2.75 at TD Securities.

NEXT WEEK'S EVENTS

Monday:

  • June wholesale trade sales released by Statistics Canada @ 8:30am ET
  • West Texas Intermediate September contract expiry

Tuesday:

  • API Weekly Statistics Bulletin released @ 4:30pm ET

Wednesday

  • EIA Petroleum Status Report released @ 8:30am ET

Thursday:

  • June payroll data released by Statistics Canada @ 8:30am ET
  • EIA Natural Gas Report released @ 10:30am ET

Friday:

  • EIA Monthly Energy Review - August 2016
  • US GDP released @ 8:30am ET
  • Federal government Budget Balance released @ 11:00am ET
  • Baker-Hughes Rig Count released @ 1:00pm ET

Next edition of the Oil Sands Weekly: Friday August 26, 2016 @ 8pm MT.

The Oil Sands Weekly

The Oil Sands Weekly

The Oil Sands Weekly

The Oil Sands Weekly

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