Canada has been a big beneficiary of the Biden Administration’s reversal in policy towards the energy sector. In order to increase exports of lighter grade oils to Europe from Commercial Stocks, the SPR and rising light oil shale production, Gulf coast refineries need large amounts of Canadian heavier barrels of crude. Canada has met the challenge thanks to the expansion of Enbridge’s Line 3. Last week the EIA reported that Canada increased supplies to the US by 312Kb/d on the week to 3.465Mb/d, providing 61.2% of US Imports (Chart #27). What stands out is that Canada is providing 564Kb/d more than a year ago.

US crude production is also benefiting. Production has risen and reached 11.9Mb/d last week. In the key basins in the US  (Chart #28) drilling activity is picking up due to the fabulous economics and President Biden’s 180 degree reversal to now ask the industry to grow production as a matter of national security! The EIA projects in their monthly US Drilling Productivity Report (Chart #29) that the main shale basins will see production rise by 132Kb/d in the month of May to 8.65Mb/d. Overall crude production in the US is forecast to grow to 12.5-13.0Mb/d by year end. The all time high was 13.1Mb/d and this could be exceeded this year if spending ramps up faster than consensus.

The E&P companies in Canada have responded to the need for more productive capacity. The weekly Baker Hughes drilling data (Chart #30) support the production volume growth thesis. The US rig count is up 59% from last year to 695 rigs of which 549 are drilling for crude oil (up 60% from a year ago). In Canada the rig count is currently depressed by the road bans during spring break up but are still up 84% to 101 rigs versus 55 last year. Once breakup is over this should recover quickly to over 200 rigs. An important point is that todays rigs drill faster and with pad drilling production can come on faster.

Insiders in the US have seen their stocks rocket higher this year and become one of the best performing sectors. They are now taking profits after the tough years that they faced when the industry was a pariah and access to capital was limited. Insider selling is now at the highest level seen in over a decade (Chart #31).

Natural gas volumes are also ramping up to meet domestic demand and the LNG export market. All US LNG export facilities are at full capacity so new operations need to get approvals. The industry has on the drawing board potential to more than double the current 14-15Bcf/d of capacity. The current high prices make this attractive to do but operators need long term commitments to justify the high capital costs.

The EIA forecasts that natural gas production in the US will grow by 0.72Bcf/d in May (see Chart #29 again) to 90.8Bcf/d. The biggest production rises are expected from the Haynesville, the Appalachia area and the Permian.

Storage right now is below the five year average and is not refilling as it has in the past due to the rise in LNG export volumes. Last week 53Bcf were added to storage (Chart #32) and this was just above the five-year injection rate of 44 Bcf (Chart #33). The problem is that storage is 16.8% below the five-year average and 22.8% below last years storage level. That is why NYMEX and AECO prices are staying at high levels. NYMEX last week traded at US$6.47/mcf and AECO at C$6.23/mcf. These are fabulous prices for this time of year and why natural gas stocks have been great performers.

The price of natural gas is now quite overbought and speculators are heavily involved (Chart #34). This is a recipe for a quick reversal if there is a market disruption or demand is curtailed by weather events (a cooler summer than forecast or the recession hits and lowers demand materially).

We like natural gas for the long term and see strong demand as we transition to renewables. However, a recession will hit this area just like it would hit crude oil. So be patient and wait for the next low risk entry point. In March 2020 we sent out a long list of Action Alert BUYS with a focus natural gas stocks and we believe such a window could occur during late Q3/22. Patience for now.