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nadian data comes out relatively infrequentlyDecember

2011 numbers are the latest we have).Prior to the last five months sudden jump, Albertas light and

medium oil production had been in a long-term decline. Theboom in oil sands production (synthetic and bitumen on ourchart) more than compensated for the stagnation in conven-tional production so that Albertas overall crude production

steadily increased over the last three decades. Most of the sud-den rise in Albertas light and medium production comes from

the re-exploitation of existing oil wells with the technologicalone-two punch of horizontal drilling and multiple-stage frack-ing. Note that in focusing only on Albertas production, the

Saskatchewan side of the now famous Bakken shale formation

has not been included in the first chart. This means that in-creased targeting of Albertas tight sandstone and carbonate

formations like the Cardium, Viking, Beaverhill, and Montney,and not shale, have been responsible for this new production.

That being said, Saskatchewans light and medium oil produc-

tion has also been rising quite significantly, largely due to newwells in the Canadian side of the Bakken shale (see chart 2wehave also included BC). Barrels per day have shot up in the lastthree months of 2011 in particular, marking a doubling in Sas-katchewans medium and light oil production in just six years.

Alberta still produces far more light and medium oil than Sas-

katchewan, so the doubling of Saskatchewan's contributionhasnt had a huge effect on net Canadian results.

In chart 3 we compare the renewal in production from the

Are growing crude oil supplies in North America finally pushing down oil prices?

For the last year and a half we have been writing about the ongo-

ing migration of the same technologies that caused a continent-wide gas glut towards the oil side of the hydrocarbon spectrum,and how this is causing a renaissance in US onshore oil produc-tion. See hereand here. At last we are starting to see evidence ofthis same renaissance emerge in Canada with publication of Statis-tics Canadas most recent non-oilsands production data. As chart1 shows, Albertas light and medium crude oil production (the

red line) bottomed in early 2010, dithered around for anotheryear, and then exploded upwards in the last five months of 2011.(Compared to US oil production data published by the EIA, Ca-

Pollitt & Co. Inc.

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Weighty oil

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Western Canadian Sedimentary Basin (WCSB) with that of on-shore Texas and the US Bakken (this includes the sum of NorthDakota and Montana). Texas is at least 12-16 months ahead ofAlberta in terms of technological adoption so, using the Lone Starstate as a model for Western Canada, we expect production fromthe WCSB to keep growing strong for the remainder of 2012.

How much has this jump in North American production influ-enced the recent selloff in oil?

In general, all risky assets stocks, commodities, and non-USDcurrencieshave been in a downtrend since spring. Breakingdown what component of oils decline has been due to general

market weakness and what component has been due to supply-side developments unique to oil markets is difficult. Well sim-

plify by looking at just three assets: the S&P 500, copper, andWest Texas Intermediate oil (WTI). All three registered majortops on April 30, 2012 (see chart 4). From that date to their ab-solute lows, the S&P fell 10.5%, copper fell 16.1%, and oil fell26.8%. This is certainly an outsized fall for oil.

The information contained in this report is believed to be reliable, but its accuracy and/or completeness is not guaranteed. All opinions, estimates and other information included in this report constitute our

judgement as of the date thereof and are subject to change without notice. Pollitt & Co. Inc. does not issue ratings or price targets on any securities mentioned within this letter, nor does Pollitt & Co. Inc.

maintain and publish current financial estimates and recommendations on securities mentioned in this publication. Pollitt & Co. Inc. discontinues coverage of the stocks highlighted in this letter. For informa-

tion on our policies on research dissemination, please see our website, www.pollitt.com. Stock Recommendation System and Terminology: Pollitt does not issue price targets for companies. Pollitt intends to

maintain a Buy List of 10-15 stocks. The listing of a stock on the Buy List should be considered as advice to carry a position in that stock. The removal of a stock from the list should be considered as advice to

reduce a position in that stock. Pollitt provides continuous coverage of all stock ideas on its Buy List. Stocks currently on the Buy List are Franco-Nevada, Molson Coors, Peyto, Pulse Seismic, and Nordion.

As chart 4 also shows, oil has not only fallen further but has re-quired more time to carve out a bottom. Equities and copperflattened out on June 2, but crude didnt hit its bottom till June

27. Some factor, evidently, has been weighing on oil more thanthe other risky assetsalthough its tough to determine whethethat something is the tight/shale oil production boom, politica

events in the Middle East, or the China slowdown.

The longer term oil-to-copper ratio (see chart 5) shows nothing

abnormalalthough it has been weakening for the last sixmonths, the ratio is still hovering around the midpoint of itsthree-year range. On the other hand, the oil-to-S&P500 ratiojust hit its lowest point since early 2009. Should these ratiosdecouple further, and we think this is likely, it will be hard forthe market to conclude that supply-side considerations have notbeen responsible for oils relatively poor performance.

John Paul Koningjpkoning@pollitt.com

Toronto, OntarioJuly 12, 2012

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