Enerplus Corp ERF

Oil Stocks Commentary

[retiredcf]

Why is there such a disconnect between the oil price and Canadian energy stocks? Every oil stock seems to be selling like oil is 50-60 dollars when in reality it is 96 today and has been over a 100 for months. Furthermore, both the 
IEA and OPEC have said that the energy crisis is going to get worse. It is also apparent that OPEC has little spare capacity. And if the war ends, why would the sanctions go away after what Russia did to the Ukraine? Finally, the amount of free cash flow the Canadian oil companies are banking is mind boggling while history shows demand destruction in a recession in minimal to zero. So why the huge disconnect? 

We can't really explain this fully. Some times (most times?) the market can be somewhat irrational in the short term. In Canada energy was the only sector working, and many fund managers need to be careful not be offside in terms of sector weightings. In other words, they tend to sell when the sector declines, in order to maintain relative performance (to the index). Certainly recession fears have outweighed war and supply fears, for the moment. That might continue until we get a better picture of the economy. Biden is visiting Saudi Arabia so there is some speculation of a deal (didn't happen) even though capacity is indeed tight. Versus other energy cycles, the sector remains cheap and corporate balance sheets remain strong. We also offer some third-party commentary below: (5iResearch)

Rising virus cases in China and looming US inflation data are stoking concerns about demand. Meanwhile, dwindling liquidity is also exacerbating price moves while money managers turned more bearish on the main oil benchmarks last week, cutting their net-long positions to the lowest since 2020. The volatility in commodity markets increases the stakes for putting money to work.  The decimation of other commodities has also reduced risk appetite for crude even in supply constrained market. Despite recession fears, several energy administrations agree that supply tightness is set to worsen. IEA’s Executive Director Fatih Birol said nations “might not have seen the worst” of a global energy crunch while OPEC’s first look at 2023 showed no relief from oil market tightness. Crude has fallen since early June on escalating fears the US may be heading for a recession as central banks hike rates aggressively to combat inflation. Yet physical markets continue to show signs of strength. Premiums for North Sea oil were bid at the highest since at least 2008. The oil futures curve also remains backwardated, where near-term contracts are more expensive than those for later delivery.