‘Wounded bulls’ feeling jittery despite swift rise in oil prices
Investors being more conservative after ‘getting burned in Q4 of last year’: analyst
Despite a rapid spike in oil prices Monday, investors are watching from the sidelines as they ponder whether to jump in amid a broad rally in global energy stocks, led by the Canadian energy index.
“This is definitely not a crowded trade,” said Michael Tran, RBC Capital Markets managing director of global energy strategy, about rising crude prices.
Unlike the latter half of 2018, when bets that global oil prices would rise outnumbered short contracts by nine to one, funds are being more conservative during the current oil price rally.
Tran said the number of long contracts for crude currently outnumber the shorts by just four to one. “Everybody still remembers getting burned in Q4 of last year,” Tran said, describing the bullish investors on the sidelines as “wounded bulls” who were singed by a 16-per-cent plunge in oil prices during the period. But a renewed rally has once again raised investors’ hopes, amid higher demand and tightening supply.
Crude oil prices surged Monday after the U.S. government said it would not extend or re-issue waivers for oil-importing countries such as China and India to continue purchasing oil from Iran.
U.S. Secretary of State Mike Pompeo said the administration was intent on driving Iranian oil exports to “zero,” with help from allies Saudi Arabia and the United Arab Emirates.
Tehran, meanwhile, remained defiant, saying it was prepared for the end of waivers, while the Revolutionary Guards repeated a threat to close the Strait of Hormuz, a major oil shipment channel in the Gulf, Iranian media reported.
The Brent benchmark jumped three per cent at one stage to hit US$74.27 per barrel. The West Texas Intermediate benchmark also rose, adding 2.7 per cent to reach US$65.70 per barrel.
The U.S. benchmark is now up more than 39 per cent year-todate, and RBC’s Tran believes it could climb higher.
He expects Brent could average US$75 per barrel this year and WTI could average US$67 per barrel, with risks to prices moving higher.
Oil prices have been rising steadily in the first four months of this year and their sharp spike this week comes as Canadian oil producers begin reporting their financial results on Tuesday.
PrairieSky Royalty Ltd. will kick off earnings season Tuesday, followed by major oilsands producer Cenovus Energy Inc. Wednesday.
Shares in Canadian oil producers rallied along with oil prices Monday, led by a six-per-cent rise in heavy oil producer Baytex Energy Corp. to $2.24 each.
Analysts at Calgary-based investment bank Peters & Co. Ltd. expect cash flows for large Canadian oil companies in the first quarter to rise 44 per cent over the final quarter of 2018.
Similarly, Peters’s analysts believe domestic intermediate-sized oil companies will post an average of 40-per-higher cash flows this coming quarter on the back of higher oil prices and despite lower production figures from the Alberta-government mandated production cuts.
The S&P/TSX Capped Energy Index is up just over 20.37 per cent year-to-date, outperforming the U.S. S&P Energy Index, which is up 19.58 per cent, according to Bloomberg data. The MSCI Europe Sector Index was up 13.06 per cent during the period.
Many Canadian companies are expected to show improved results given higher global oil prices and much smaller discounts for Canadian heavy oil relative to the U.S.
“There’s a real dearth of that type of crude,” Tran said, noting that heavy oil supply from oilsands projects could feed refineries in Asia, if the country were to build an export pipeline such as the Trans Mountain expansion (TMX) project. “It’s periods like this when Canada is missing out on significant upside potential.”
There’s a real dearth of that type of crude. It’s periods like this when Canada is missing out on significant upside potential.