Canadian Rig Count Increases By Significant Number Relative To US Drop -- January 18, 2016

A reader noted that the number of active rigs in Canada jumped by 61 this past week compared to a continuing drop off of oil and natural gas rigs in the United States. My "not-ready-for-prime-time" reply:

If there is a logical reason for the sharp increase in the Canadian rigs (not due to political subsidies, supports, tax breaks, etc), one might think it has to do with the type of oil being produced. 

US refineries along the Texas/Louisiana coast were all optimized for heavy oil from Canada -- that conversion was done years ago in anticipation of the Keystone XL. Those refineries are now saturated with light oil, which they cannot process without a good addition of heavy oil.

It's very possible that what we are seeing with the increase in Canadian rigs makes "logistical" sense: the light oil glut in the US will result in rigs coming down in the US (light oil) and rigs increasing in Canada (heavy oil).

Also, there is some increased interest in Bakken wells and Spearfish wells just north of North Dakota in Canada. 

It is also much cheaper, relative to the US, to drill in Canada now. The Canadian dollar is near an all-time low at 70 cents US.

And then look at this forecast five days ago: Canadian dollar will drop to 59 cents US in 2016, a Canadian investment banker in Canada forecasts. The banker's new forecast doesn't see the loonie above 65 cents US at any time between the end of 2016 and the two years that follow.

It is also possible Canada will announce two rate cuts this year.