‘Wounded bulls’ remain nervous as oil prices rally ahead of earnings season

CALGARY — Despite a rapid spike in oil prices, investors are watching the rally 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, 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 like China and India to continue purchasing oil from Iran. Mike Pompeo, U.S. Secretary of State, 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 3 per cent at one stage to hit US$74.27 per barrel. The West Texas Intermediate benchmark also rose close to 3 per cent to reach US$65.79 per barrel.

The U.S. benchmark is now up more than 39 per cent year-to-date, 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.

Research from Scotiabank dated April 12 offers a more conservative outlook for oil prices and forecasts WTI prices to average US$59 per barrel through 2019, rising to US$61 per barrel in 2020.

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 on Tuesday followed by major oilsands producer Cenovus Energy Inc. on 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. Cenovus was up almost three per cent to $13.85 each, Suncor Energy Inc. almost two per cent higher to $45.35 and Imperial Oil Ltd. eked out a 0.6 per cent gain to $39.61.

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’ 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%, 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., but RBC’s Tran said the current state of the global heavy oil market would provide an even bigger boost to Canadian companies, if only they could export more of their product.

“There’s a real dearth of that type of crude,” he said, noting that heavy oil supply from Canadian oilsands projects could feed refineries in Asia, if the country were to build an export pipeline like the Trans Mountain expansion project (TMX).

“It’s periods like this when Canada is missing out on significant upside potential,” Tran said. “If TMX was already built and flowing barrels today, Canada would be winning an outstanding amount of market share in those key demand areas (of China and India).”

In Canada’s absence from global markets, Saudi Arabia was strategically selling its heavy oil production into China and India while Iranian sanctions were expected to take that country’s heavy barrels out of the market, Tran said in a research note.

Other Canadian heavy oil rivals Venezuela has seen its production free fall amid political turmoil in the South American country, while Mexican heavy oil production has been steadily declining for years.

“Considering the experience of last year, we expect Saudi Arabia and its allies to cautiously react to customers’ needs rather than pre-emptively ramp up production,” UBS analyst Giovanni Staunovo said in a research note.

Oil prices could rise from current levels, says Staunovo, “amid seasonally higher oil demand into the summer, the oil market is likely to be very sensitive to any further market disruptions in Libya, Venezuela or Nigeria.”

However, Staunovo said it’s unlikely Iranian exports will fall all the way to zero given China’s opposition to the American move to unilaterally impose sanctions on the Middle Eastern country.

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With a file from Thomson Reuters

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