Earlier this month, Alberta Premier Rachel Notley mandated a 325,000 barrel per day supply cut representing 8.7% of the province’s total oil production, intervening in the market in an attempt to push prices higher.
What’s going on here?
It was an overall bad year for stock prices around the world, but Canadian stocks and Canadian energy stocks, in particular, have been among the hardest hit. The TSX is down 8.7% year-to-date and the energy sector is down a whopping 16.7% in the same time period.
Too much supply generally means downward pressure on prices, and that’s what we’ve been seeing play out with oil prices this year. Part of this is courtesy of a shale boom that helped set a record this past summer for U.S. oil production, boosting already-high oil inventories. A glut of supply has occurred globally, and the result has been downward pressure on oil prices worldwide.
Canada’s oil has been amongst the hardest hit. While the rest of the world has been trading at about $50 per barrel, Alberta’s oil exports have been trading at a steep discount, hitting a low of $14 last month. Why? In short, most of Alberta’s oil is “heavier” and needs to be refined before it can be used as an energy source. Alberta producers are also landlocked. They don’t have many access points to refineries--most of which are in the US Gulf Coast--and so are at the whim of what American purchasers will pay.
Last week, however, the Alberta government took matters into its own hands, moving to raise prices by mandating a 325,000 barrel per day supply cut representing 8.7% of total production. It also set a 10,000 barrel-per-day exemption to protect smaller producers. Stocks have moved up since the announcement, and Canadian oil is now above $30 per barrel. However Canadian energy stocks have a lot of lost ground and are still sitting in last place--Canada’s worst performing sector for 2018.
What does this mean for investors?
Oil and gas production is a significant part of Canada’s economy, and as such, most Canadians are heavily exposed to greater fossil fuels through our indices. Energy stocks account for about 18% of the TSX, Canada’s main equity index. Compare that to the U.S.’s S&P 500, where energy stocks account for just about 5%. When buying a traditional Canadian equity mutual fund or ETF, investors should be aware that 20% of the underlying products are likely oil and gas stocks.
Oil prices have been volatile since they fell drastically in 2014, and most analysts believe the volatility will continue in 2019. For Canadian investors, having 20% of your Canadian equity holdings being impacted by an underlining volatile commodity is a risk to be aware of.
As of November 30, 2018, Source: https://ca.spindices.com/