Why energy stocks have lagged oil prices
Hi, my name is Steve Bonnyman, and I am a Portfolio Manager with AGF, with some thoughts on the energy market in today’s Weekly Perspectives. Despite the setbacks of February, crude oil prices have retested the highs of January, with Brent Crude above US$72 and WTI above US$67. What is noteworthy is that the long end of the oil price curve remains anchored in the low $50’s, and long term prices, as implied by equity share prices, remain below $60 per barrel.
Looking through the market noise to underlying fundamentals, we remain supportive of a higher near-term oil price.
Demand remains robust, and while there would appear to be lots of potential new production, the challenges of getting oil to market (with pipelines, trucking and terminals) continue to constrain delivery growth in both Canada and U.S.
While oil prices have reached what we assess to be a longer term sustainable price level, commodities rarely find balance at normalized levels, and the existing tailwinds to prices are likely to drive oil higher through at least 2018. Perhaps more importantly, we forecast an upward move in the long end of the oil price curve, as the market adjusts to the new reality of market balances and supply dynamics. While we got the oil price call right, the Energy Equities have failed to keep pace with the oil price, underperforming the commodity by almost 30% over just the last the last six months. And, as mentioned, continue to imply long-term oil prices well below existing spot prices.
We see this gap narrowing over the next year, and while regional, geographic and production mix variables will materially differentiate the performance of specific equities, we assert that the group is set for a sustainable period of outperformance. This should also be supported by an opening of equity market breadth. Performance in the broader equity markets has been concentrated in a couple of sectors, and as observed recently, weakening in the crowded Tech sector coincided with the outperformance in the under-owned Energy space, as some funds migrated to these opportunities. We expect this phenomena to continue. For the medium term, our energy equity bias continues to focus on oil producers over natural gas producers, and U.S.
Eamp;P’s and Global Integrated producers over Canadian names. This reflects concerns regarding the continued transportation challenges for Canadian products and the wide price differentials between Canadian and U.S.
pricing for both oil and gas. Thanks for listening in, and have a great week.