Oil prices surged to a 14-month high on Wednesday, triggered partly by unrest in Egypt, a factor that may pull some investor interest back into a Canadian energy sector that has been pressured for months by uncertainty over obstacles to increasing oil sands crude exports.
Canadian oil companies such as Suncor Energy Inc. and Imperial Oil Ltd., which produce and refine the fuel, may surprise investors with strong second-quarter results in the coming weeks as world crude prices climb and Canadian prices follow suit.
Strong oil prices have not translated into share gains recently, though that has less to do with oil market fundamentals than the way large investors are allocating their money, said Chris Feltin, analyst at Macquarie Capital Markets Canada Ltd.
"The equities haven't really responded," Mr. Feltin said. "The Canadian institutional investors are largely positioned where they want to be, but the U.S. and international investors have been walking away over the past couple of years because they saw increasing risk with Canada in terms of its ability to grow, with reduced visibility for getting any pipelines built, like [Keystone] XL and Northern Gateway."
TransCanada Corp.'s Keystone XL, which would carry 830,000 barrels a day to U.S. Gulf Coast refineries from Alberta, and Enbridge Inc.'s Northern Gateway, which would move 525,000 barrels a day to the Pacific Coast, face opposition from environmental and native groups. The contentious projects are meant to boost returns for Canadian oil by giving producers of the commodity access to international markets where prices have been higher than those in the middle of North America.
Several factors have improved fundamentals for Canadian oil sand producers. Canadian heavy oil's discount to U.S. benchmark West Texas Intermediate has narrowed in recent months due to oil sands production delays, rising rail shipments and the impending start-up of new processing equipment at a major U.S. Midwest refinery run by BP Plc., which will take in large volumes. Western Canada Select heavy blend crude sold for $15.50 a barrel under WTI on Wednesday, according to Net Energy Inc., compared with a discount of more than $40 in January.
U.S. light crude jumped $1.64 (U.S.), or more than 1.5 per cent, to settle at $101.24 a barrel, after Egypt's military told the country's President Mohammed Morsi that he no longer holds his post. In a televised broadcast, the head of Egypt's armed forces issued a declaration suspending the country's Islamist-backed constitution and appointing the constitutional court's Chief Justice as interim head of state. That boosted market worries that crude shipments through the Suez Canal or Suez-Med pipeline could be interrupted.
Meanwhile, in a clear sign of tightening supplies in the United States, the U.S. Energy Information Administration reported that inventories fell by more than 10 million barrels, the biggest drop for that week in nearly 13 years. The factors have helped squeeze Brent crude's premium to WTI to around $4.50 a barrel. That premium hit more than $23 a barrel last winter as Canadian and U.S. supplies flooded into the Midwest and Cushing, Okla., a storage hub.
In second-quarter results, the largest integrated oil companies should show the financial benefits of the strong heavy and light oil prices, as well as healthy refining returns, possibly triggering some dividend increases and share-price gains. The Toronto Stock Exchange's energy group was up 0.2 per cent on Wednesday and remains 9 per cent below its year high set 10 months ago.
While many institutional investors appear to be more focused on U.S. crude producers as money remains tight for the Canadian oil sands developers, that may change, said Martin Pelletier, managing director and portfolio manager at TriVest Wealth Counsel.
"The longer prices stay at these levels, the greater comfort investors have with oil stocks, and capital will once again work its way into the sector," Mr. Pelletier said.
With files from Bloomberg News