The stock market is full of opportunities for those who know how to find it. Of late, the Canadian oil and energy stocks offer scope for making lucrative gains. These stocks have been characterised by a pattern of abnormally large sell-off followed by recovery, in the last few years.
In January and February this year (2017), many oil stocks endured an abnormally large sell-off to the range of over 20 percent in a month, bringing down the associated indexes with it. The biggest losers include Crescent Point Energy Corp, which shed about 24 percent of its value, and Baytex Energy Corp., which lost 30 percent of its value. A similar pattern occurred in early 2016 as well, when stocks fell sharply owing to overall pessimism on the oil industry, only for prices to rebound and almost double later in the year. Some stocks even tripled and quadrupled. Sound rebound is almost certain after bouts of extreme pessimism, when prices fall sharply, defying all fundamentals and the underlying value of the stock.
Just as in 2016, the recent sell-off is irrational, and mostly on fears of doomsday scenarios that have very little chances of actualising. In early 2016, there were speculations oil could drop to as low as $15 or $10 per barrel. The recent crash is more inspired by fears of the Trump administration imposing border adjustment tax, or tax on imports into America. If such a tax comes to pass, U.S. refiners purchasing Canadian crude would need to pay tax, giving them an incentive to look elsewhere. However, such tax is an unlikely prospect, owing to poor public support, and the political risks higher oil prices bring in, when refiners pass on the higher cost to the customers. What further blunts the prospects of such taxes having an adverse impact on demand for Canadian crude is the approval of two new pipelines from Canada to the US. Kinder Morgan Canada Inc.’s Trans Mountain pipeline and Enbridge Inc.’s Line 3, to the U.S. Midwest, are now approved, and would be commissioned soon.
One additional thing going for oil and energy stocks now is the stable crude prices now. In 2106, oil stocks recovered even as crude oil prices kept on plummeting.The outlook for crude oil is now favourable.
Yet another macro-level trend favouring Canadian stock companies is OPEC’s historic decision to cut about 1.8 million bpd of production. Such cuts, which is already underway, is also expected to give crude oil prices a boost. The International Energy Agency (IEA) estimates a shortage of 800,000 bpd of crude oil in the market, in early 2017. Corroborating such outlook is Washington’s Energy Information Administration’s statement that records U.S. crude oil inventories falling by about 900,000 barrels by the end of 2016. Such shortage is expected to boost prices, as the traditional time-tested theory of demand and supply plays out.
Trying to time the market is not a good investment strategy. As the caveat goes, past performance is no guarantee of future results. However, investors who have an eye to spot such macro-level trends can reasonably hope to strike it big, if they buy when prices are depressed.
The bottom line, all things considered, in the case of oil stocks, is such stocks offering the potential for extremely lucrative gains. As things stand, Canadian oil stocks offer a bell weather on the Canadian stocks in general, with rising oil stocks lifting the indexes. Smart investors would do well to add high-quality energy names to their portfolio, while the overall sentiment still remains weak. Once a recovery happens, they would likely miss the bus.
The movement in oil stocks underlines the impact macro level conditions have on stock prices. Smart investors keep an eye on such macro level fundamental shifts, to pick out stocks with weak sentiments, and where prices do not do justice to the value on offer. Individual investors may not be able to keep track of all variables efficiently, especially since the trends shift fast. They would do well to open an account with reputed brokers such as CMC Markets. Established brokers have their own in-house analysts, keep track of such macro-level trends, and pass on the rich insights to their clients. Clients who trade based on such advice minimise their risks considerably, as they are making educated investment decisions, rather than merely trying their luck.