Investing in Oil Now

Above all, the resulting “double, double” trouble stems from the overhang of a prolificĀ  oil boom and the havoc of Saudi Arabia’s “damn the torpedoes” pumping policy in order to maintain its market share in the face of the rising hreat and the re-emergence of Iran as a major world producer. No one, no matter how expert, foresaw an oil price collapse of such magnitude. Or the consequences of the oil tsunami that was to hit investors as well as oil-dependent economies and governments the world over. Such was the shock effect that 2015 dealt stock markets their worst year since 2008. Only U.S. benchmarks and a highly questionable China ended marginally in the black. In Canada, an 11% year-over-year fall in the TSX Composite and an accompanying 16% drop in the Canadian against the U.S. dollar (from 86 to 72 cents) combined for a precipitous 30% decline, among the worst in world terms!

After Saudi Arabia’s contrived collapsing of benchmark West Texas (WTI) and Brent prices from over $100/bbl to less than $30/bbl in less than two years, the geopolitics of world oil began giving way to who would blink first. These pressures have intensified as OPEC partners like Iraq and Iran threaten still more supply, others like Venezuela and Nigeria face bankruptcy cbd vape pen and collapse, non-OPEC Russia is pushed deeper into recession, and the higher-cost Bakken and otherĀ  shale fields find it increasingly difficult to break even. In Canada, our once-burgeoning oil sand producers – indeed the nation’s entire energy industry and its principal Alberta hub – are facing intensified survival pressures. Yes, double, double trouble – and more! While Saudi Arabia remains in the driver’s seat because of its prodigious production cost advantage (thought conceivably a good deal higher than the widely-touted $10/bb) it too faces the mounting pressures of war on two fronts (Yemen and ISIS), and a ballooning budget deficit to 20% of GDP or higher. Significantly, the Saudis might also be coming to the realization that $40-50/bbl was probably enough to achieve their market preservation goals, not $30/bbl or lower!

The recurring consultation and dialogue between Saudi Arabia and others about restraining world oil production at January levels is bringing fresh hope of price stabilization at levels higher than the earlier extremes. Also, that the price of just above $26 in late-January and early-February could have marked the bottom. Over-supply risks persist, but receding U.S. shale oil production is likely also helping benchmark prices recover to today’s $35 – 40/bbl level. In turn, the extreme speculation in oil price futures has cooled as traders, hedge funds and others scramble to cover short positions. Longer-term supply-demand considerations are also in the process of resurfacing. Exxon Mobil, for example forecasts that rising global population and emerging market economic growth will lead to a one-third surge in global energy demand by 2024 in which oil will feature centre-stage. Interestingly, Imperial Oil, its Canadian subsidiary, has announced the divestment of its nationwide downstream service stations so as to reinvest the $1.8 billion of proceeds in its Alberta oilsands ventures. Another example is of Suncor Energy, Canada’s largest integrated oil company, pressing on with its multi-billion Fort Hills oilsands in northern Alberta. And, all of this as cutting costs and curbing carbon emissions continue relentlessly, both with mounting success.

Also noticeable is how the Canadian dollar, back up to the U.S. 76-77 cent level, keeps moving – and recovering – in lock step with world oil prices (refer the chart). Not long ago, the respected Seymour Schulich called the rebound in oil prices “inevitable”, with an accompanying “slingshot” effect on Canadian energy share prices. Jim Gray of yesteryear Noranda and Canadian Hunter fame reminded how oil has always been a volatile business as he saw fortunes waiting to be made in the beaten-up Canadian and Alberta oil patch. In releasing adverse oil- Acknowledgements: Globe & Mail impacted results for 2015, Don Guloien of Manulife surmised the time to “back up the truck” could be at hand.

 

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