Pump jacks pump oil at an Encana well near Standard, Alberta, May 12, 2014.
It's the energy rally no one seems ready to believe in.
Surging crude prices pushed Canadian oil and gas stocks to three-month highs on Monday, but investors bitten for more than a year by short-lived gains are wary of calling an end to the downturn.
U.S. benchmark West Texas intermediate crude jumped 5.5 per cent to $37.90 (U.S.) a barrel, and international Brent crude cleared $40 a barrel, despite record inventories and the prospect of more supplies from Iran hitting the market in the coming year.
WTI has roared back 45 per cent since dipping to just above $26 less than a month ago. A few days after that drop, Saudi Arabia and Russia agreed to freeze oil output if other major producers joined in the effort.
Some analysts say prospects for improving demand in the coming months and the need for short sellers to buy into the market to cover off-side positions are contributing to the rally.
Is recovery at hand, or is this another mirage?
"The reality is, the fundamentals really haven't changed," said Jackie Forrest, vice-president at ARC Financial Corp. in Calgary. "We still have very high inventory and, as of last week, even higher storage levels in the U.S."
One change on the supply side has been a reduction in U.S. shale oil, or "tight" oil, output following deep cuts in spending by producing companies since the crude collapse began well over a year ago. A 43,000-barrel-a-day drop in December versus November output was reported last week, and it could be the start of a steeper slide after months of expectations.
"I think there's a growing consensus that tight oil's really going to start moving down, but I don't think we have enough data to say that absolutely," Ms. Forrest said. "So I would just say there's some positive signs in that, but we've still got a lot of headwinds."
Canada's energy sector has been in survival mode for at least a year, slashing budgets to the bone, laying off tens of thousands of workers and seeking ways to assuage nervous lenders, including putting choice assets on the auction block.
Last week, Canadian Natural Resources Ltd. and Baytex Energy Corp. both made double-digit percentage cuts to their capital spending budgets for 2016. Baytex also said it had shut off about 7,500 barrels a day of unprofitable heavy crude oil production.
On Monday, investors pushed the shares of Baytex and most other Canadian energy firms sharply higher, wagering that prospects of the now-much-trimmer producers are improving.
The Toronto Stock Exchange's oil and gas group gained more than 2 per cent to its highest since early December, when crude prices were stronger than they are today.
Gainers were led by companies that have been dealing with large debt loads, such as Encana Corp., up 11 per cent, Paramount Resources Ltd., up 12 per cent, and Baytex, up 10 per cent.
In the broader market, a long-successful strategy of buying the U.S. dollar on strength while shorting commodities such as oil may be coming to an end, said Jeremy McCrea, an energy analyst at Raymond James.
"It's been going on now for a few weeks, which is starting to give some guys hope that maybe we did see the bottom," Mr. McCrea said. "But there's still a big group of investors that we talk to who said they don't believe the run, and given the current fundamentals, the equity price moves appear to be premature."
Martin King, FirstEnergy Capital Corp.'s price forecaster, is not convinced that the oil rally will last, with U.S. inventories brimming as refineries head into spring maintenance. However, prospects for improving demand through the year suggest a less bearish tone, if not a bullish one, he said.
"This is a bit of a head fake to me. I think we're due for some downtrend in the next couple of weeks," Mr. King said. "Do we go back to $26 [a barrel]? Probably not. Do we go back to the low $30s? It wouldn't take much of a move to do that."
Equity investors may not see that as a signal to sell off, though, he said. "I think people are now looking through the bottom and seeing a road to recovery. It's going to be bumpy, uneven, but I think the stocks will just look right through it."
Jeffrey Jones