The price of crude oil has been showing surprising strength, despite concerns about a slowing Chinese economy, the rise of U.S. energy production and the popular belief that the commodities supercycle of rising prices and insatiable demand has ended. But Canadian energy stocks aren’t following oil’s lead.
West Texas intermediate crude, the U.S. oil benchmark, rose above $100 (U.S.) a barrel on Wednesday for the first time in a year. In afternoon trading, it rose to $101.35 a barrel, up $1.75. From a recent low in November, crude oil has risen about 20 per cent and is now at a 14-month high.
There are a number of reasons for the recent surge in the price of oil. The latest political conflict in Egypt is one of them: Although the country is not a big oil producer, its control over the Suez Canal makes its location in the Middle East essential to the flow of oil from other producers.
As well, the latest reading on U.S. oil inventories from the Department of Energy showed an unexpected decline of more than 10 million barrels. That was a larger-than-expected decline that marked the biggest weekly dip this year, according to Bespoke Investment Group.
But what’s interesting about the rise of the price of oil is that is occurring even as concerns persist about the health of the global economy. In its most recent forecast, the International Monetary Fund pegged global growth this year at just 3.25 per cent. Developed economies are expected to growth just 1.25 per cent.
Even emerging markets, once the global dynamos, are struggling. China’s gross domestic product expanded just 7.7 per cent in the first quarter, down from 11.9-per-cent growth as recently as 2010, amid worries about a hard economic landing there. The stock market has been reflecting wider concerns – including the impact of withdrawn economic stimulus from the U.S. Federal Reserve – with the iShares MSCI emerging markets exchange-traded fund down 15 per cent this year.
The buoyant oil price suggests that these economic concerns are being exaggerated – especially when you consider that U.S. energy production is on the rise, putting the world’s biggest energy consumer on the path toward energy independence. In 2012, U.S. oil production rose by an estimated 780,000 barrels a day, the biggest increase ever, according to the Energy Information Administration.
Curiously, though, Canadian energy stocks have shown a stubborn refusal to follow oil’s bullish ways. Since November, when oil began its most recent rise of more than $15 a barrel, the S&P/TSX energy index has risen just 4 per cent. Key individual stocks have been doing even worse: Suncor Energy Inc. has fallen 10 per cent and Canadian Oil Sands Ltd. has fallen 2 per cent.
This dismal performance stands in contrast to decent gains among U.S. energy stocks. The broad S&P 500 energy index has risen 13.5 per cent since November. More specifically, the S&P 500 integrated oil and gas index has risen 11 per cent and the S&P 500 oil and gas exploration and production index has risen 18 per cent.
Clearly then, investors are worried about the U.S. market for Canadian oil, and perhaps with good reason: The Obama administration is still holding back on its support for construction of the Keystone XL pipeline. In a speech, President Barack Obama even referred to the Canadian oil sands as “tar sands” – a loaded term often used by opponents of Canadian oil development.
However, the rising price of oil suggests that these concerns are overblown. It points to a tight global energy market that, one way or another, is going to seek out Canadian oil. It also points to substantial profits for Canadian oil producers.
That’s not a bad combination. If the price of oil remains high, chances are that Canadian energy stocks are going to have some catching up to do.