Oil Futures March: Up Through the Ground Came a-Bubblin' Crude

TERRY PETERS, Canaccord Genuity (02/12/2009)
Slightly bearish crude oil inventories data was reported yesterday. Stockpiles increased by 4.7 million barrels compared with expectations for an increase of 2.8 million barrels. Current crude oil inventories are at 350.8 million barrels and are 16.5% above last year’s levels. Meanwhile, gasoline inventories decreased by 2.7 million barrels versus expectations for inventories to increase by 0.5 million barrels. Gasoline inventories are currently 5.1% below last year’s levels. Elsewhere, in other macro data, the International Energy Agency (IEA) said that global demand for oil is expected to fall 1.2% this year, that's the biggest annual drop in 27 years. Canaccord Adams Oil and Gas Analyst Terry Peters continues to believe the current market environment has increased the likelihood that M&A activity will return to focus over the coming year. Major oil companies have come through the recent period of high energy prices flush with cash, while reinvestment in the core business has lagged. Share performance, which has been bolstered by share buybacks and high earnings, will increasingly need to be driven by underlying growth in production and reserves. Unfortunately, new growth opportunities are often found in high-risk areas of the world, and in areas where competition from state energy companies is intense. One region that would appear to offer the capacity for meaningful reserve and production growth in a reasonably stable fiscal environment is Canada, and in the oil sands in particular. The market capitalization of large-cap Canadian energy companies has declined by over 50% from their recent peak in July of 2008. While part of this performance reflects the drop in oil prices, the balance relates to overall equity markets. Peters believes that major oil companies look beyond the short-term environment, particularly for assets, such as oil sands that have a 40-year-plus reserve life. There will most likely be several bull market cycles for energy over that time period.

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