Friday, June 8, 2018

Longterm Hydrocarbon Bull

Look at the graphs for oil (top) and natural gas prices. They cover the last five years. Oil prices peaked in 2007 but remained for many years in the $80 to $100 range. The large decline came in 2014 and the oil prices bottomed in 2016.  We have now experienced a 4 year long sanitization of the petroleum industry with chronic under-investment. But you can also see that the bull market in oil and gas started at the dark days of 2016. Share prices for oil and gas companies have declined until last year and only turned around in 2018. Gas prices also bottomed in January 2016 and after a vigorous recovery have consolidated over the last 2 years and now may be poised for another up-leg. Gas production, these days is strongly linked to unconventional oil production such as in the Permian basin, which lately, like Canada’s Montney play is pipeline constrained. Permian oil, like our AECO gas and heavy oil is significantly discounted due to those restrains. Many consider North America oil and gas poorly connected with the rest of the World. After all, the U.S. hasn’t exported hydrocarbons for decades and is, just like Canada, missing a lot of the infrastructure to export oil and gas off the continent. That is about to change but will take time. Consider that West Texas Intermediate trades for nearly $10 dollars less than the world standard Brent Oil price and Canada, in turn, trades currently at a $14 discount to WTI. The upside for Canada’s oil and gas industry is tremendous! Nothing of that is reflected in today’s share prices of Canada’s oil patch.
With Doug Ford announcing that Ontario is open for business and the political landslide the PCs experienced shows that Canada is finally waking up. Many Canadians realize the damage done by the NDP and Liberals. With Canada to swing back to right-of-political-centrum, there is light at the end of a tunnel. Yet this is early days and our oil patch is still severely depressed. The cheerleaders of ‘green energy’ and renewable energy are being confronted with reality. Even if it would take only until 2030 to change the energy mix, that is a nearly 10-year investment horizon. That while the hydrocarbon usage on this planet still rises by nearly $2 million barrels per day, each and every year and while a lot of the electrification of our energy supply likely will be powered by natural gas and other fossil fuels. Thus, count on at least another 50 years of hydrocarbon dependence. The prediction that oil & gas is a sunset industry is bogus. As they say, there is still a day and night cycle on this planet – don’t count on batteries taking up the storage slack as there is already a shortage of rare earth supply and demand for silver is about to sky-rocket. What do you think the environmental impact of all that future mining is going to be? And… Resource rich Canada will be at the front of the coming energy battle.

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