Ouch! For our Canadian investors in commodities, times have certainly been better.
The TSX has been dragged downward by mining and energy concerns this week, and investors are understandably worried. Some see it as a natural part of a cycle, others as a taste of what is to come. What should be kept in mind are entropy and relativity. Late ’07-early ’08, in comparison to most other years, has been a period that saw a huge boom for those involved with commodities, especially hydrocarbons. Relative to oil prices in the 1990s, barrels have been much more expensive, resulting in almost unprecedented returns to investors. With that in mind, entropy has reasserted itself.
No serious investor assumes that his/her investments will continually improve without any risk. Similarly, it would be “unserious” to assume that the events of the past week represent an all-time high. Unless you believe that your stocks and trust units are destined to become worthless, it might be a better strategy to hold on to them for the time being. (Note: If you are heavily exposed to the ventures, holding on is a less attractive strategy).
Keep in mind, people still use oil. We do not have any easily adaptable alternative fuels. Companies that have invested multiple billions of dollars in heavy oil and oil sands projects want to see returns on that money.
Watch out for Hurricane Ike. The storm is headed for the Texas Gulf Coast, and refineries have already begun pre-emptive shutdowns. Though Gustav was relatively mellow when it crossed energy infrastructure, hurricanes are inherently unpredictable. Upgrader hopes that everyone in the storm’s path is prepared.
Chevron (NYSE:CVX) has concluded an agreement with the Government of Saudi Arabia to extend its concession in the Saudi portion of the Saudi-Kuwaiti Neutral Zone. (Fun fact: The area was believed to have so little economic worth that ibn Saud, and Britain’s man in Kuwait did not even bother to assign it when the border was established). However, the area has since been found to hold significant oil reserves, including the two billion barrels of oil in Chevron-operated fields. Chevron will continue to produce roughly 600,000 bpd (260,000 heavy) in conjunction with the Saudi state oil company.
Valero (NYSE:VLO) was forced to suspend operation of its heavy oil cracking unit at the Corpus Christi refinery due to damage sustained during a fire. Reuters is reporting that the repairs should take about a week, and reduce output by “80,000 barrels per day” of gasoline and 7,500 barrels per day of distillates.
Tullow’s (LSE:TLW) Ugandan exploration continues to go gangbusters, with another great drilling result near Lake Albert.
In Focus: Canada’s federal election
Well, it appears that we canucks are to once again decide who is fit to lead the country. One of the first articles I wrote for this site was about the implications of a Conservative or Liberal approach to the oil sands. Hopefully, it isn’t horribly dated, but check it out here. I have been trying to track down the Honourable Messrs. McGuinty and McCallum for details on how Liberal Party Leader Stéphane Dion’s Green Shift plan would treat less carbon-intensive oil sands production. The Conservatives have yet to reply to my original interview request, so hopefully more will be forthcoming.
In essence, the Conservatives want a status quo for the oil sands. Prime Minister Stephen Harper is an Albertan himself, and the development of the resource has been very good to that province. Ironically, Newfoundland (another oil producing province) is not particularly fond of the Honourable Mr Harper’s party.
New Democratic Party Leader Jack Layton has begun the campaign with a flight over the oil sands, saying his party would introduce a moratorium on new licences for producers. The NDP is hardly in danger of winning a majority, and does not currently hold any seats in Alberta, so expect some fierce anti-oil company rhetoric.
Though polls seem to indicate a likely Conservative government, the Liberals may be able to achieve a minority government of the kind that has recently characterized Canadian politics. One important ‘X’ factor will be the relative importance of economic and environmental issues when Canadians enter the ballot box. Random and uncontrollable events have a way of impacting elections disproportionately. One such event was the recent death of hundreds of birds that landed on an oil spill in Alberta earlier this week, reminding voters that the country’s oil industry is not an unalloyed good.