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Finding Value and Returns in an Unstable Oil Market




obsidian energy gas


In the constantly fluctuating oil market, a significant draw on oil inventories generally means a bullish outlook for the oil industry and bullish returns for investors. For Obsidian Energy and other Canadian producers, the revenue outlook looks quite optimistic after a prolonged, messy battle between the bears and bulls of the market. For months, market forces, including a shutdown in the Keystone Pipeline, drama in the House of Saud, and threats of Norwegian divestment have created significant impacts on the international market oil market. Unsettled weather in the United States due to a succession of severe storms has also impacted the general trajectory of markets, with significant effects encountered in North America. With all this recent unsettledness in mind, Brian Belski, who serves as the chief investment strategist at BMO Capital Markets, notes that “expectations remain broadly too low for the sector.” Cautioning investors to monitor their energy exposure beyond the short term, Belski adds, “we do believe there is likely still room for energy stocks to outperform near term, but investors should be prepared to tactically reduce energy exposure as WTI approaches $60/bbl.”


That said, Obsidian Energy emerges as one of the few bright spots in an otherwise topsy-turvy energy sector. With a new name, a new President/CEO, a precise mission, and deepening shareholder confidence putting wind in its sails, Obsidian Energy is poised for a prosperous 2018. Calling Obsidian, “transformed,” National Bank Financial sees a positive trajectory for the Calgary-based producer. While there is no failsafe predictor of the overall health or distress of the energy sector, it seems clear that Obsidian Energy, along with a few other gems among notable Canadian producers, are poised to make a splash among shareholders in 2018 and beyond.


OPEC and America


US crude oil inventories remain the “most transparent and visible oil inventory metric in the world.” A bellwether for the overall trajectory of the oil market, US inventories continued to provide mixed signals in November. For the week ending on November 10, US oil inventories saw a six-million-barrel build, leading to concern that prices and revenue would continue a downward trend. Forecasting the week ending November 17, the American Petroleum Institute (API), predicted a drawdown of inventory in the two-million-barrel range.  When the actual drawdown tripled expectations and resulted in more than a six-million-barrel drawdown of inventories, the previous week’s rise in build was completely erased, leading to a healthy upward spike in prices. The arrest of the chief executive of PDVSA’s US-based subsidiary Citgo on corruption charges, along with news that bankrupt Venezuela was seeking free oil from its partners, deepened the upward trends in prices. That said, neither catalyst has the power to trigger a prolonged uptick at the cash register.


All eyes are fixed on OPEC in the days after substantive meetings in Vienna. While monitoring the production and geopolitical conditions of its member producers, OPEC continues to closely watch US crude oil inventories, with special concern placed on any large, short-term builds in gasoline or US crude inventories. If oversupply fears began to rise, OPEC is poised to do “whatever it takes” to ensure that prices do not plummet, thrilling consumers but punishing investors. That said, the stability of its member countries is still the number one concern of OPEC. Additional shakeups in the House of Saud, for example, could lead to the sort of fear that instantly yet acutely brings intrigue to inventories and prices.




Canadian producers like Obsidian Energy may benefit from Russia’s decline in market share across multiple sectors. As US production rises and US producers continue to cut into Russia’s market share, more and more Asian countries are reaching to US producers to assuage their domestic demand. Indeed, US production is not going to decline in the foreseeable future. Russia’s political entanglements in Syria, Ukraine, and the Crimean Peninsula may also serve to restrict production and spook nations looking to tap Russian imports to meet demand. Could Obsidian Energy and other Canadian oil producers occupy an increasingly robust share of oil imported by Asian economies, joining the US in cutting Russia’s “slice of pie?” Most certainly.


The Future for Canadian Producers


An energized Obsidian Energy and a host of other Canadian producers continue to ride the wave of fluctuating oil prices, joining a host of international providers watching and waiting for signs of market stability in the energy sector. With anxieties still festering in OPEC states, rising influence among US producers, along with the impacts of Russia’s various geopolitical entanglements, Canada’s energy companies may be especially well-positioned to deepen revenue and market share in the upcoming year. Bottom line? Good times may be ahead for shareholders of Canadian producers.


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