The West Texas Intermediate crude price has climbed 27 per cent since Dec. 12 and the S&P/TSX Composite Oil and Gas Exploration and Production subindex followed along, adding 28 per cent. BMO senior economist Art Woo, however, believes the bulk of the gains are likely behind us despite the inevitable calls for US$100 crude from energy-focused fund managers.
WTI crude oil is trading near US$87 per barrel but Mr. Woo is comfortable with his forecast of an US$80 average price for 2024. He believes that current prices are close to an equilibrium level where Saudi Arabia is happy but it’s not yet high enough to spur a supply response from the U.S. shale industry.
The economist notes that geopolitical events - further bombing of Russian refineries or spreading of political unrest in the Middle East, for instance - is the primary upside risk for crude. Mr. Woo estimates that even a stronger global economy will not result in oil demand growth coming in significantly above the International Energy Agency estimate for 2024 of 1.3 million barrels per day.
Downside risk for the oil price revolves around excess supply. OPEC nations have remained disciplined about production cuts but Mr. Woo reports that “intra-cartel relations remain tense [and] the unity of the cartel hinges on Saudi Arabia’s willingness to continue shouldering the load of cuts.” Further acrimony could lead to some nations increasing oil exports to gain market share.
Supply growth from non-OPEC nations, including Canada and the United States, is another downside risk for the commodity price. Citi analyst Max Layton recently published a report predicting that non-OPEC supply growth will be sufficient to cover expected increases in global oil demand this year and in 2025.
Prominent analyst Randy Ollenberger leads BMO Capital Markets coverage of oil and gas producers. He believes the sector remains attractively valued on average, particularly in the cases where companies are increasing returns of cash to shareholders through higher dividends or share buybacks.
Mr. Ollenberger has “outperform” ratings on ARC Resources Ltd., Imperial Oil Ltd., Canadian Natural Resources Ltd., MEG Energy Corp., Tourmaline Oil Corp. and Cenovus Energy Inc.
-- Scott Barlow, Globe and Mail market strategist
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Stocks to ponder
BCE Inc. (BCE-T) Count Rob Carrick and John Heinzl among the slack-jawed multitude watching this battleship of a stock get decimated. The dividend’s still growing, but BCE’s share price has fallen by 14 per cent this year and 28 per cent in the past 12 months. Both columnists provide an update on what market professionals are saying about the stock (click here and here).
Canadian Tire Corp. Ltd. (CTC-T) Shares have slumped 28 per cent since July, reflecting the company’s declining fortunes. It is now trading at levels seen five years ago. But the dividend-paying stock has plenty of company as it navigates cautious consumers. That may be comforting: It suggests that the retailer isn’t floundering with misguided direction or poor execution. Rather, it is facing a tough environment that may be largely reflected in the current share price. David Berman tells us more.
The Rundown
The market expects a soft landing. There are reasons to be skeptical
After a rip-roaring year in which U.S. stocks surged by more than 25 per cent and global stocks soared more than 20 per cent, we should now brace ourselves for a bumpier ride ahead. It’s not that the North American economy is crumbling. But as Ian McGugan tells us, it is sending a flurry of mixed signals.
Also see: U.S. stocks’ lofty valuations in spotlight as earnings season nears
Globe Investing Club members smashed index with stock picks. And one competitor stood out
Globe readers, take a bow. Through stubborn inflation, high interest rates and on-again, off-again recession concerns, the stock picks submitted to our inaugural Investing Club Challenge delivered market-beating gains by the finale. They also demolished our own efforts at assembling a winning collection of stocks. David Berman has the results.
Don’t count on the Magnificent Seven staying magnificent forever
There’s plenty of talk about how concentrated the U.S. stock market has become. The top 10 stocks account for 31 per cent of the S&P 500 Index. This has happened because a handful of companies have built powerful and enduring businesses that disrupted incumbents or created whole new industries, including what’s dubbed the Magnificent Seven. But as Tom Bradley points out, there are a few important things to know about the top 10.
Others (for subscribers)
The most oversold and overbought stocks on the TSX
Monday’s analyst upgrades and downgrades
Monday’s Insider Report: President of this high-flying tech company cashes out $69-million
Ask Globe Investor
Question: I’m curious as to why Canadian Banc (BK-T) shares with a Net Asset Value of $19.75 are selling for $10 to $11, while paying a monthly dividend of around 13 cents. They invest in the big six Canadian banks, so should be very secure investments. They use covered calls to raise the dividend over what banks are paying. If their shares were valued at the NAV of $19.75, the dividend would be about 8 per cent which seems about right, given the banks are paying out dividends in the 4-5-per-cent range. Many thanks for any insight you can provide. – Kerry G., Smithers, B.C.
Answer: Canadian Banc is one of several companies offering split shares based on bank stocks. Premium Income Corp. is another. All operate in much the same way, with an issue of preferred shares that offer guaranteed dividends and an A share issue that offers capital gains plus any dividends remaining after the preferreds have been paid.
All the A split shares that I looked at have NAVs that are far higher than the trading price. This may be due to the high volatility in these shares. In January 2022, BK was trading at $15.16 a share. As I write, it is at $10.73, down almost 30 per cent. The 14.4-per-cent yield, based on the latest distribution, may look attractive. But the total payout over that period did not cover the capital loss, leaving investors with negative total return.
Of course, other time frames will produce different results. Buying now, while the shares are cheap, may be a winning strategy. Just be aware of the risk.
--Gordon Pape (Send questions to gordonpape@hotmail.com and write Globe Question on the subject line)
What’s up in the days ahead
The Contra Guys look at their latest investment case for Extendicare
Click here to see the Globe Investor earnings and economic news calendar.
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Compiled by Globe Investor Staff