OPEC production cut uncertainty combined with the threat of a potential U.S. border tax created panic among Canadian energy investors in the month of January. This panic has led to a roughly 10%-15% drop in the Canadian energy complex, creating a compelling buying opportunity for investors. Firstly, OPEC stated this week that members in January have delivered on about 82% of their deal to lower supply by 1.16 million bbl/d (suggesting that initial OPEC compliance with the pledged reduction has been relatively high). Further, Russia stated that it has reduced production by 100,000 bbl/d and is on track to meet its targeted reduction of 300,000 bbl/d. These initial numbers would suggest that compliance risk around planned OPEC cuts is quite low.
Secondly, investors remain concerned about a potential U.S. border tax, which could put the Canadian energy industry at a significant disadvantage to its U.S. counterparts (i.e. U.S. producers would have a 20%-25% inflated sales price). This border tax coming to fruition appears unlikely as implementation would significantly increase gasoline prices for U.S. consumers (anywhere from $300-$400 per household per year in additional gasoline expenditures). Further, historical data suggests that a strong inverse correlation exists between gasoline prices and U.S. Presidential approval ratings. Accordingly, it would seem unlikely that the White House would want to risk further impacting its already low approval ratings. Finally, the U.S. needs Canadian oil to help it achieve its goal of North American energy security and would likely not risk this outcome with a punitive tax on Canadian oil. Overall, the current fears in the market place that have impacted Canadian energy stocks in January would appear to be unwarranted. Once additional clarity is provided on these issues, it is very likely that valuations for Canadian Energy stocks will once again continue on their upward trajectory.
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Jason SawatzkyA Canadian Energy expert Archives
October 2020
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