Canadians living in the Province of Ontario have had a rather annoying situation to deal with recently, as they have had to experience a gasoline supply shock. The shortage was due to a fire that occurred at one of Imperial Oil’s refineries last week, which caused a gas shortage at 75 out of the 400 gas stations in the province that the company supplies.
Of course, although the public was informed that panicking over the situation would be ill advised, everybody — including
consumers, competitors, and private suppliers — did just that. So, for the first time this weekend, I was amused to see some of my die-hard, car-loving friends use public transit because they couldn’t fill up their tanks. Believe it or not, it was actually difficult to find a gas station that had gas to sell at any price!
Sure, this is only an example of how supply shocks can adversely impact a market’s equilibrium. However, bear in mind that we are not talking about economies of scale here. This gas shortage shall pass, too. The really interesting question is what investors should think when it comes the performance of the oil-and-gas patch in Canada. While there were no similar supply or demand shocks that disgruntled the great Alberta oil sands, the oil patch still offered a weak performance in 2006.
Why? Well, oil and natural gas prices lost some of their luster in the global markets, while Ottawa certainly didn’t help when it came to orchestrating an income-trust overhaul. Yet, experts in the field are expecting a much better performance in 2007, particularly when it comes to oil producers who have managed to keep their costs in check.
Why is cost reduction in the oil sands so important? Simply put, the oil sands consist of a hard, molasses-like mixture of sand and oil, where separating the oil from the sand is a very expensive undertaking. The oil has to be exposed to high-pressured steam that will enable it to flow, as it has no hydraulics of its own. This would not be such a problem for close-to-surface exploration; however, when miners have to go underground and perform this process in situ, it’s a completely different thing. This is why Canada’s oil patch needs help in the form of higher market prices of crude oil.
In response to this need, analysts are calling for an average price of crude that’s between $65.00 and $70.00 per barrel in 2007, while natural gas should average between $7.00 and $8.00 per cubic foot. Based on these forecasts, many industry experts are recommending increasing investor exposure to energy stocks at the expense, for example, of financial stocks, which seem to be peaking at the moment. Helping the case for energy stocks is a reflection of current investor sentiment. Apparently, income-trust investors seem to have regained their ability to address this issue.
Just make sure that when you are making your oil picks, you examine each stock’s fundamentals. Look particularly into each stock’s cost structure, how expenses are accounted for, how much money, if any, is put back into the business, and other important points of this nature. Managing costs and retained earnings is still key to seeing a good performance in the oil patch