25.11.2018 kl 20:47 1988

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GLUT is a 4-letter word

Logistics modeling can help explain the situation. When we observe a logistics distribution system and see increases in storage at some nodes this can be driven by two factors. Oil flows upstream to downstream to end users. So if a node's storage builds then production upstream from that node is high OR takeaway is low. In the case of Canada and the US the Canada node feeds into the US node which releases into a global floating node. When a main rivers floods it backs up tributaries. Since TransMountain does not yet exist nor Energy East the ports for Alberta and Saskatchewan are those in Texas and Louisiana.

Is there a glut in Saudi Arabia and Iraq - no - in fact Saudis are reducing storage so no glut there. In Nigeria or Brazil - no. In floating storage at sea - no. We see gluts only in the US and Canada.

Are we heading to another clear extended global glut like 2015 and 2016? Floating storage and OCED inventories so far say no. Remember floating storage rising in 2015 to an extra 100 million barrels at sea? Not happening now...why not...because there is no global glut.

Will a global glut form? A lack of long lead time projects coming online 2019 to 2022 says no. A growth happy US shale industry says yes. An OPEC+ that can reduce output some says no. A slowing global economy says yes.

So is there a glut? Yes...in the US and Canada.

Is there a global glut - no. But maybe one will form...

What will happen - does not take a phi beta kappa for this one - either a) more oil flows out of the US into the floating global market or b) US and Canada production recede.

Prices do not care they just react and see that balance is restored.

Now prices are saying three things - 1) US short cycle do your thing and show us how you can reduce output quickly by slowing completions and take advantage of high decline rates....same for Canada...and 2) OPEC do your thing and collectively reduce output in a controlled manner. And 3) all you consumers out there go ahead and buy more yes it is a Black Friday sale on oil as well...

Is there a silver lining to this crash - yes - US shale is taking over price formation from OPEC and it is short cycle. Since it is short cycle any crash in oil prices will be short in time - as will a spike in oil prices.

Regarding Canada - infrastructure has lagged because of legislative feet dragging and judicial activism. Judicial activism has been important because of the surprise factor. Had the oil industry known ahead of time the problems with TM and KeyStone they would have chosen another path like Energy East or Enbridge additions or rail. The political system has checks and balances and TM could be declared in the national interest but the government is dragging its feet. Why is irrelevant to the markets. Supply has increased with a 300 kbpd addition of oil sands in 2018 and gradual increases through the rest of the supply base. Originally TM was asupposed to finish end of 2019 but now it looks like maybe 2023. Railroad takeaway is growing at about 40 kbpd monthly but this takes time and railroads want two to three year contracts so producers are reticent putting pressure on discounts. Last summer the situation pressured discounts but when an outlier shoulder season hit refineries that take most of the Canadian crude this caused discounts to spike. Empty pipeline space was not diverted to export. So inventories went up and now there is a backlog of excess oil waiting to get out into the US which itself is backlogged.

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