Canadian oil stocks have once again proven that, even at sub $50 oil, they can be the most explosive asset class in North America.
3 Factors have led to renewed optimism in Canada’s ever reliable oil patch:
- A firestorm of geopolitical tension in the Middle East
- Recent comments from OPEC suggesting a truce among its members may be in the cards
- Fears that production shut-ins in North America will take longer than expected to come back online
OPEC Secretary General Abdallah Salem El-Badri stated on October 6th that:
“We have no problem with cooperating with anybody. Even with the United States producers. If they want to talk to us, we are willing talk to them, because now the situation is really affecting almost everybody. United States, OPEC, non-OPEC, everybody.”
source: http://oilprice.com/Energy/Energy-General/Did-OPEC-Just-Call-Time-On-The…
Saudi Arabia, OPEC and Russia fight for oil money
This change in attitude by OPEC (led by the Saudis), combined with a new report from the IMF projecting the Kingdom will run a $21.6 billion deficit in 2015, up from $3.4 billion in 2014, has the market pricing in higher oil.
The deficit in Saudi Arabia has caused its leadership to implement a spending moratorium, proving that the Kingdom might not have the stomach to see this oil price war through, and could be considering a cut in production to boost margins from its oil exports.
Given the fact it was the Saudis who initiated the price war in a bid to vanquish US shale oil from the market, while at the same time taking market share from Libya, Iran and Russia, the Kingdom’s change in tune has brought about optimism for higher prices in the near-term. It has also reiterated to the market that $40 oil is simply unsustainable.
This realization was all it took for Canada’s beaten up oil and gas sector to put together a historic week in the market. Hallmark Canadian oil and gas companies, including Encana Corp., Baytex Energy, and Penn West Petroleum, soared in value this past week.
Encana was up for its 8th consecutive trading day Thursday, having rallied over 20% in less than 2 weeks.
Encana Corp – 2 Week Chart
Baytex Energy has seen an even more immediate and impressive rebound in its share price. The beleaguered producer has to be among the TSX’s worst performers in the past year, falling from a high of $40 per share to a recent low of $3.92. Its shares have rebounded more than 30% since October 2nd and were up for a 5th consecutive trading day Thursday.
Baytex Energy – 2 Week Chart
Baytex’s collapse in 2014 and 2015 serves as a reminder of just how volatile even blue-chip oil and gas stocks (with billion dollar market caps) can be. The leverage energy stocks provide to investors in comparison to the price of oil is a major lure when WTI is rising; but, when oil prices decline, a stock will typically fall much faster, as witnessed in the past 18 months.
* During the last oil price collapse in 2009, Baytex’s stock hit roughly $10. At the end of 2011 it traded for nearly $60.
Penn West Petroleum, the most traded stock on the TSX Thursday and Friday, is an extreme example of what a quick change in sentiment can do for an oil and gas producer.
Penn West hit a low of $0.60 on September 30th and has been rallying every day since. Its shares are up well over 150% to a recent high of $1.82.
Penn West Petroleum – 2 Week Chart
Gains like this rarely present themselves more than once a year, but they can signal a prolonged reversal in investor sentiment.
Oil: The World’s Favourite Bargaining Chip
In January of this year we explained how Saudi Arabia was the ‘Orchestrator of Oil’s Collapse’. For months Saudi Arabia went against the grain in OPEC, flooding the market with cheap oil and driving down prices in an attempt to crush competition.
In our January report, we revealed the fears, motives and hopeful outcome for Saudi Arabia. Now, almost 9 months later, the Saudis’ plan is backfiring, and the country just announced a spending moratorium.
The spending moratorium is bad timing for the Saudis as unrest in the Middle East escalates and Russia, and potentially even China, enters the fold to bolster the Syrian regime. In the Orchestrator of Oil’s Collapse we exposed the huge public spending the Saudis undertook during Arab Spring (2010 and 2011) to quell any chance of an uprising in the Kingdom. The Saudi leadership’s main solution for many domestic problems has been to throw money at them. And during the Arab Spring, it appeared to work as riots and protests occurred in many neighboring countries, but not the Kingdom. With the country now staring at an abyss of deficits, it is cutting social spending in an attempt to stop the bleeding of this self-inflicted wound. This could result in social unrest…
Deficits Rise in Middle East
Due to the oil price collapse, the Saudis are facing nearly a decade of potential deficits.
Saudi Arabia is not alone with its deficits, either. Countries from Angola to Libya are being crushed by low prices and geopolitical turmoil.
According to a recent IMF report, Libya, which was running a budget surplus of 11.6% of GDP in 2011, will be running a whopping budget deficit of 79.1% of GDP this year.
Few countries have suffered more than Russia in the wake of lower oil and gas prices. However, the Russians are making their next strategic geopolitical move and are taking a leadership role in the ongoing Syrian crisis in a bid to stabilize, on its own terms, the Middle East.
In our Volume from earlier this year, we explained the relationship between Russia, Syria and Saudi Arabia:
“Russia is the Saudis’ biggest competitor in the global oil market. Saudi Arabia is the world’s number one exporter of oil; Russia is number two. Furthermore, Russia has played critical roles in recent years defending both direct threats to the Saudis: Iran and Syria. A weakened Russia positively serves the Saudis’ economic and national security interests.”
Oil Showdown in Middle East
Unlike in past decades when the U.S. determined the winner, Russia is the new shot caller in the Middle East. In a video interview from Thursday morning, titled Middle East has new sheriff… Russia: Boone Pickens, energy mogul T. Boone Pickens talks about Russia reasserting itself in the Middle East after nearly a 40 year hiatus.
With Obama playing it safe, Putin sees an opening and is taking matters into his own hands in the Middle East. It’s no secret that higher oil prices will be good for Russia. And stabilizing Syria is critical to controlling the flow of oil in the Middle East.
Geopolitical tension will guide oil for years to come. While the price will remain choppy and likely fail to sustain any significant rally in the near-term, due to the fact that a global supply glut still exists, a production cut from OPEC could allow North American producers to rally through year end. This is especially true if oil can stabilize in the $50 to $60 range. On Friday WTI crested above $50 for the first time in nearly three months.
All the best with your investments,
PINNACLEDIGEST.COM
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