MARKET OUTLOOK FOR SIA CHARTS
Crude Oil Prices Remain Subdued
Beginning in the second half of last year global crude oil prices began their precipitous fall from a high of $107 in June 2014 to a low of $43 in January 2015. Since that time prices appear to have found a bottom and recently rebounded to $49 as of February 27, 2015 (StockCharts, 2015).
At the most basic level the fall in oil prices was due to an imbalance in supply and demand. With vast reserves now accessible through unconventional drilling in the United States, the country has improved its energy independence. United States foreign imports of light crude oil have decreased from greater than three million barrels per day in 2010 to less than one million barrels per day in 2014 (ARC Financial Corp, 2015). The surge in U.S. oil production, lower global demand due to slowing GDP growth, and the refusal of OPEC to cut production and lose market share have all contributed to lower oil prices. The price of oil was due for a correction, but current levels appear unsustainably low given long-term costs to oil producers. The exact break-even price varies by geography and producer, but it is clear current market prices are not sufficient to cover all expansion projects as firms continue to slash CAPEX budgets.
U.S. horizontal tight oil rig counts have dropped by 21% this year over 2014 averages. In Canada we have seen a similar occurrence as weekly Canadian oil and gas drilling rigs in January 2015 are down 45% from January 2014 (ARC Financial Corp, 2015). Keep in mind these figures can be slightly misleading, given that companies are now drilling deeper and more efficiently than any time in the past. This means that despite the count for drilling rigs decreasing, the resulting decrease in production will be much lower, if any. U.S. production has continued to increase so far in 2015 and estimates are for production increases in 2016 (EIA, 2015).
Average WTI Crude Oil prices were $97.91 in 2013, $93.26 in 2014, and are expected to average $55.02 in 2015 and $71.00 in 2016 according to the U.S. Energy Information Administration (EIA, 2015). Predicting future oil prices is difficult and many factors need to be considered. At Morrison & Partners Wealth Strategies we are not commodity price experts. Our strategy is not to predict future price movements, but purchase companies with growth in cash flow, strong balance sheets, and steady margin that can weather commodity price declines. We remain cautious on the space, but do maintain exposure in midstream oil and gas companies with predictable cash flow generation.
ARC Financial Corp. (February 24, 2015). ARC Energy Charts: A Case of Oil Rig Arrhythmia.
U.S. Energy Information Administration. (February 27, 2015). Short-Term Energy Outlook. Retrieved from EIA website at http://www.eia.gov/forecasts/steo/report/prices.cfm.
StockCharts. (February 27, 2015). $WTIC Light Crude Oil – Spot Price (EOD) CME. Retrieved from StockCharts website at http://stockcharts.com/hsc/ui?s=$WTIC&p=D&id=p03546597559&a=90235385&listNum=3.
This newsletter was prepared solely by Bruce Morrison who is a registered representative of HollisWealth™ (a division of Scotia Capital Inc., a member of the Canadian Investor Protection Fund and the Investment Industry Regulatory Organization of Canada). The view and opinions, including any recommendations, expressed in newsletter are those of Bruce Morrison only and not those of HollisWealth. TM Trademark of The Bank of Nova Scotia, used under license. Morrison & Partners Wealth Strategies is a personal trade name of Bruce Morrison.