Are Oil Prices Artificially High?
President Donald Trump sure seems to think so. This morning Trump denounced "artificially high" oil prices via his infamous Twitter account. He is claiming that that the Organization of the Petroleum Exporting Countries (OPEC) was "at it again" and that such behavior "will not be accepted."
We wish to comment on this due to the fact that we see fundamental improvements justifying the current levels we are seeing. Late yesterday, WTI crude prices hovered near US$70/barrel, which is something we haven't seen since December of 2014. This is a far cry from the $40 mark it hit in early 2016 due to over-supply issues. Demand has been consistently rising and is forecasted to increase further over the coming months. With an OPEC committee that seems to be determined to maintain supply cuts, and some members reportedly in favor of an US$80 price target, it appears to us that the current price may very well be justified as we head into the fuel intensive summer months. With a low surplus supply, energy markets can become very sensitive to factors like hurricanes that can disrupt production.
Canaccord's North American Strategist Martin Roberge pointed out that "strong demand and tight supply should allow petroleum inventories to cross below their 5-year moving average soon". In past cases following this cross (see chart below), oil went on to trade at much higher prices (53% returns on average before the next peak). Considering the tight supply, rising demand, OPEC objectives, summer volatility and Canadian transportation bottlenecks, we would suggest that the current short-term rally in energy stocks may continue for a while longer. What remains to be seen is whether this is just another false start, but the chart below suggests it probably is not.
Source: Thomson Reuters Datastream, Canaccord Genuity estimates