Why oil firm stocks aren't gushing profitWhy oil firm stocks aren't gushing profit
BILL CARRIGAN
Last Monday crude oil futures on the New York Mercantile Exchange posted a record close price of $41.50 (U.S.) a barrel. The business press responded with Tuesday morning pictures of panicky crude traders screaming at each other in the crude pit.
The Saudis tried to cool down the oil markets by proposing to boost production by 6 per cent. A high-profile analyst serves up some sobering information.
We are reminded the Saudis' huge oil basin is almost depleted and there have been no major crude oil discoveries in the world for several years, Texas was all drilled out 40 years ago. The Western Canada basin is not far behind.
Most of North America's hopes for domestic crude now rely on the Athabaska Oil Sands (Syncrude), the North Slope of Alaska, the Beaufort Sea and the Grand Banks.
The bullish outlook for energy has portfolio managers being interviewed by the financial press for their "picks from the patch."
We also have a shortage of refining capacity, which may not keep up with the demands of the summer driving season.
The fear of higher energy prices killing the current recovery has the equity markets spooked as any attempted rallies fade away at the close.
The direct beneficiaries of the current high crude prices would appear to be a handful of Canada's senior oil and gas producers, such as Canadian Natural Resources Ltd., EnCana Corp., Imperial Oil Ltd., Petro-Canada and Suncor Energy Inc.
Now, before you run out and buy these things, keep in mind that if you own any of the large Canadian equity funds, you probably already own at least two of these energy stocks.
The top 10 holdings by weight in most Canadian equity funds are at least four banks, two energy stocks, one insurance company and three of something else.
Aside from all the good news surrounding the sector, the charts do flash a negative signal for the group. In technical lingo, we call it negative price divergence.
Our chart this week shows the weekly closes of Suncor Energy plotted above those of New York light sweet crude. Historically there has been a high degree of price correlation between the price of crude and the price of Suncor in spite of the greater price volatility of the crude price.
The sudden price changes in crude are matched to a lesser degree by the price of Suncor.
In any event, Suncor is a crude-price-sensitive stock. Also note the recent price action of Suncor — its stock declined through April into May in spite of the rising crude prices. Negative price divergence.
Suncor is not unique in this so-called price divergence with crude. A quick chart scan shows that no senior producer made a new 52-week high when crude set a price record last Monday.
The last time that happened was during the 1990 Gulf War oil price spike.
So there you are. The senior producers are predicting that we have another temporary crude price spike on our hands. If that is the case, this will blow over and that will get the broader stock market indices up and running through the summer months.
Just a reminder that I will be hosting a TSX Market Sense discussion at the TSX on Monday May 31, 2004, from 12:15 p.m. to 12:45 p.m. Admission is free, but seating is on a first-come, first-seated basis.
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Bill Carrigan is an independent stock-market analyst. His Getting Technical column appears Sunday. He can be reached at https://www.gettingtechnical.com on the Internet.