June 1, 2017
by Christopher Kanaan
THE BEST OPPORTUNITIES IF WILLING TO ASSUME SOME RISK
So I have been saying the catalyst is coming since February; I won’t deny it, I have been wrong in some investments placed in the early months of the new year and now down substantially (25%), but I am more confident and certain then ever that the catalyst for skyrocketing oil prices is coming. All the negative talk has driven the energy securities to new 52w lows and for reasons that can’t be substantiated, mostly from short trading and hedging. This is a prime time to buy for potentially short and lucrative gains. Of course, any wise man can tell you to also prepare yourself to be willing to hold out as a long or be willing to lose some money if things do not go your way.
WORST IS BEHIND US
Despite all the beatings, the anti-energy rhetoric, the talk of oversupply, two years of complete drought pricing which resulted in the bankruptcies of hundreds of companies, the lingering threat of Donald Trump’s border (BAT) tax & of course the infamous Trudeau carbon tax, we have been doing pretty good. Even Q1 results for most Canadian producers and service companies were positive. The energy sector has picked up substantially since last year and oil prices remain stable. Overall, despite a poor political climate in Canada, things persevered thru the worst of times and only better lies ahead.
Personally, I have my eyes glued on some pressing issues that can move the oil prices upwards dramatically at any given point. Right now however, I still think Texas is in the stage of instilling fear into the hearts of OPEC members to ensure they do not ever consider messing with Texas (crashing the market) again. Texas is certainly winning the battle at this point, though I still do not believe that Texas or American producers want oil at these levels long-term.
Potential factors to watch for:
1) US inventory draws (every Tues. the API at 16:30 & Wed. EIA data @ 08:30) These inventory draws will bolster investor confidence that OPEC cuts are working; OPEC cuts last year resulted in many Canadian energy securities advacing 100% in a short period of time. I’m looking for a repeat to at minimum, 52week highs of 2016.
2) Supply and demand factors: the US IEA is suggesting that supply has finally caught up with demand and demand is going to soon overtake supply, quite the nay-saying to those who suggest that the world is flooded with an unlimited supply of oil and the industry as a whole is under an EV (electric vehicle) siege. FALSE. The world demand is growing substantially, peak oil has yet to peak. Lack of development of new plays during the crashed years will see oil skyrocket to new highs, potentially in tandem with a shortage, geoconflict at the same time.
3) Geopolitical conflicts already moving: Venezuela at the cusp of collapse and most speculations suggests this alone could raise oil at least 5%; Libyan ISIS attacks on army which have intensified & attacks on pipelines; Iran threatening to test fire ballistic missiles (war games in the Hormuz strait by the Iranian Revolutionary Guards resulted in oil surpassing $140 a barrel previously); sectarian conflict/rhetoric between Saudi Arabia and Iran is something huge and if it occurs, could result in unprecedented high oil prices.
4) US government arming Kurdish fighters: While what may seem trivial in relation to the oil markets, do not underestimate the power of sectarian and ethnic conflict. The Kurds make up a substantial part of the oil producing region of Iraq and Turkey has aggressively pursued PKK fighters in the past over international borders. The Turkish-Kurdish-USA conflict is a proxy war that involves multiple countries, including Iraq. With a firebrand leader like Erdogan who is rumoured to support ISIS and Sunni radicalism, the conflict could spread much quicker then one might think.
CONTINUED STRONG CRUDE DRAWS FROM US INVENTORY
So today we had the highest crude draw according to the API since Sept. 2016; finally, wonderful news. Almost negative (-) 9 million barrels down. Hoping the US EIA confirms data tomorrow, or even better as they often do, gives us even BETTER news. It is Memorial Day weekend so the chances of an extreme drop and usage of oil is very likely.
One thing is for sure though, the market is waiting for good news and inventory draws are the most likely catalyst should we return to our 2016 52 week highs. Let’s wait and see what Saudi Arabia & Russia do in the immediate or short term after claiming that they will do “whatever it takes” to balance the market as they see fit, their economies greatly depend on it.