By Ray Turchansky, For Postmedia News, July 8, 2011
The good news for Canadian energy companies is that better stock market returns are anticipated
It's expected that oil could fall to as low as $75 US a barrel and stay there for up to nine months. A rise above $100 could cause a return to the recession.
As oil-producing countries battle with oil-consuming countries over whether or not to increase oil production, investors in Canadian energy companies can sit back in anticipation of better stock market returns ahead.
The current issue theoretically began when civil unrest in Libya curtailed oil production there, causing the price to rise above $100 US a barrel for both the international benchmark North Sea Brent and the North American benchmark West Texas Intermediate.
Among the Organization of Petroleum Exporting Countries, Saudi Arabia led a group of countries proposing that the cartel increase production to make up for the Libyan shortfall, with the ulterior motives of keeping gasoline prices low to stimulate a weak western economic recovery and keeping consumers from switching to alternative energy sources.
In December 2008, the cartel had set a target of 24.8 million barrels a day, which members fudged, producing more like 28.8 million barrels a day. Countries wanting an increase suggested a further 1.5 million barrels a day.
But another faction of OPEC members, led by Iran and Venezuela, refused to vote for a production increase, saying they were already working at capacity and needed oil revenues as high as possible to fund infrastructure and social programs in their countries.
With an impasse during what Saudi Oil Minister Ali al-Naimi termed "one of the worst meetings" OPEC ever had, the Saudiled group said it would increase production on its own.
But, taking no chances, the International Energy Agency, a group of 28 top oil-consuming countries including the United States, shocked the energy world by announcing it would release reserve stocks and increase its production by a combined 60 million barrels in the next month. The move came without an emergency such as those that caused the only two previous such moves by the IEA, namely the Iraq invasion of Kuwait in 1990 and Hurricane Katrina in 2005. Canada, while a member of the IEA, is a net exporter of petroleum so isn't required to have reserves.
The IEA motive was deemed similar to Saudi Arabia's -namely having lower oil prices strengthen economic recovery. Analysts suggested the timing hinged on the second round of U.S. government stimulus spending, or quantitative easing, being about to end on June 30.
The IEA move caught stock markets off-guard and oil prices fell to a four-month low of about $89 US a barrel for West Texas and $106 for Brent before rebounding.
Angus Watt, managing director with National Bank Financial in Edmonton, said in an interview that oil could fall to $75 US or $85 a barrel and stay there six to nine months. Then he expects U.S. President Barack Obama to become "much more aggressive in increasing oil production and natural gas production in the United States, which will increase jobs in 2012" -a presidential election year.
Indeed, there was good news for Canadian companies as a U.S. congressional panel passed a bill saying Obama must decide by Nov. 1 whether to approve TransCanada Corp.'s $7-billion US Keystone XL pipeline that would take oil from Hardisty, Alta., to the Gulf Coast of Texas.
Peter Tertzakian, chief energy economist with Calgary-based Arc Financial Corp., is among those expecting lower oil prices to be short-lived. He passed along his research report, saying the IEA move "is quite counterproductive and serves to increase, not decrease, the threat of upward oil price volatility."
He notes that "the IEA's move introduces a surprise dimension of market uncertainty that will give decision makers at boardroom tables pause on how much capital to plow into exploration and development."
In addition: "Oil prices will rise again, and second guessing what the IEA is going to do will only serve to push back the goal of a secure and balanced oil market."
Former CIBC chief economist and author Jeff Rubin predicts oil demand will exceed production in three to six months, lifting oil prices back into triple digits, which could cause a return to recession.
All of this affects investors.
Suncor, for example, is already budgeting for oil at $75 a barrel, so even at $90 there's gravy among the profits. Some junior oil companies are budgeting for oil at $50 or $60 a barrel.
Says Watt: "Oil and gas companies in North America are going to be challenged by a squeeze between operating costs and revenues. The question is if the Canadian dollar comes off, and it could easily get down to 98 cents."
The much-discussed proposed pipeline from Western Canada to the West Coast is envisioned as a much-needed gateway to oil markets in China and elsewhere.
"Our challenge today is we need more pipelines to different markets, so we don't get confined in our pricing," Watt says.
"We have to find additional markets (to) the U.S., but that's not going to happen overnight. A lot of cards are going to be played over the next 12 months because of the presidential election."
That's one area where Rubin agrees, saying that West Texas Intermediate is a landlocked price, and Canadian oil producers are well aware they could do better getting oil onto the international market at North Sea Brent prices, which have been at least $15 a barrel higher all year.
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