June 4, 2017
by Christopher Kanaan
INDIFFERENCE TO INVENTORY DRAWS
So the revered inventory draw came and went. On Wednesday, thanks to Memorial Day Weekend, the API (American Petroleum Institute) released it’s weekly inventory report. It was a staggering decline of nearly (-9 million barrels) of crude oil. Finally, so we thought, good news; on Thursday, also a day late due to US holiday, the EIA data confirmed the good news with a tiny discrepancy of (-2) million barrels off, for an official draw of 6.3 million barrels of oil from American inventory, blasting away the forecast of only 2.3 million speculated.
Coming off some great news, myself and most other energy investors would have certainly expected a typical surge on bullish reports. Coupled in part with an OPEC extension the week prior, which also unleashed a counter force to what should have been: a strong decline in oil price! What is going on? Bullish news can’t prop up energy stocks and bad news can destroy them. Almost like a doomsday scenario, and I’ll admit, as one of the more bullish believers in the energy market and higher oil prices, I was flabbergasted.
LOST MOMENTUM DESPITE BULLISH VARIABLES
Momentum certainly isn’t on our side currently. The bearish oil skeptic side has taken control of the markets and in my opinion, the negative market reaction is an overreaction which cannot be substantiated with logic. There are plenty of positive signs in the energy market that investors are overlooking, such as: consecutive strong, forecast defying declines in US inventory, steadfast dedication on part of Saudi-Russia to uptick the market, OPEC extensions with the possibility of deeper extensions in July, summer driving season with strong demand, IEA reports of a looming deficit, good market data from both Europe and United States, even here in Canada. Lots to be bullish on.
CANADIAN ENERGY COMPANIES, STRONG RECOVERIES
Despite all of this, the market has currently lost its confidence. Canadian energy companies are rebounding gradually but well. Quarterly profits in Q1 were mostly positive across the board. Canadian energy companies are making money at prices hovering around $50s. Pipelines have been approved, the Keystone XL and KinderMorgan have great potential to enhance the Canadian industry to new levels unseen before. Sets backs like the poor results from BC election’s, which saw the fringe left wing extremist Green Party & anti-pipeline NDP elected, have likely had an adverse impact on investor confidence but it is positive to see Trudeau defend the federal decision and continue to back the pipelines.
IGNORE THE PESSIMISM AND REMAIN BULLISH, IF BULLISH!
Going into the 2nd week of July, I believe it is important to ignore the negative market news and focus on the positives. Even bullish people like myself are being deterred stand at 1/4 loss in only a few months. As quickly as energy companies can drop stock price wise; they can rebound just as quick and continue surging. It is important not to sell at these prices! Oil is being shorted right now and it is only a matter of time before the market regains itself. Canadian energy companies are drop dead cheap and there are opportunities to double your money within a year if things pick up marginally.
I believe another strong crude draw is what we need. We will need a few more great draws and change of tone regarding glut to deficits to regain momentum. I believe this is coming. Saudi Arabia slashed American experts another 15%, this should have a profound impact on the US inventory reports, thereby, presumably effecting the WTI oil price as the market focuses mostly strictly on US data. Of course it would be nice to see a drop in rig count on Friday too, but shouldn’t have much impact either way.
* Keep yours eyes on Syria this week, as the US backed Kurdish fighters prepare to overtake Raqqa, the ISIS capital (and capital of the so-called caliphate.) This could get really ugly, especially if the US physically intervenes with airstrikes. The government of Turkey is very uncomfortable and hostile to US forces supplying the Kurds with weapons and have even been known to back the Islamic State terrorists fighting the Kurds near the Syrian-Turkish border. This is a conflict that could easily spread by proxy into Turkey and also Iraq.
* Another large scale terrorist attack in Britain claimed by the Islamic State. Although in Britain, the continued “ISIS” attacks have the potential to force the US or Britain to send a show of force. Any show of force or aerial assault on an “ISIS” base in North Africa or the Mideast will have a profound immediate impact on oil prices. I believe Russia will deter a US invasion of Syria but the relationship between Trump & Putin seems to be of a mutual interest regarding common enemies at this point. It is too early to determine the true status of US/Russia affairs.
* Iranian-Saudi Arabia rhetoric. There have been escalating rhetoric between Iran and Saudi Arabia. Iran’s President Hassan Rouhani has become more outspoken regarding the ballistic missile program, going so far to say that Iran does not need permission to test their missiles. Trump’s administration is stacked with “old school” US generals who despise the Ayatollah regime for the 1979 US barrack bombings in Lebanon which was linked to a Khomeini backed guerrilla group.
From an investor viewpoint, if Iran does test their ballistic missiles to the ire of the USA, it would be tantamount to winning the lottery. It was Iran that was responsible for $140+ oil when they played war games in the Hormuz strait. Of course, that was under much more extreme President Mahmoud Ahmadinejad and not the self dubbed moderate, Rouhani. Quite frankly, with the war in Yemen which is a proxy war between Iran & Saudi Arabia, potential sectarian chaos in almost every single Islamic country, the reality of this coming true is not that far-fetched.