Canadian energy shares rallied on Monday after an oil price surge following a weekend attack on key Saudi Arabian oil facilities. But sustainable gains on higher oil will be largely “diluted” in Canada’s energy patch, according to analysts monitoring the situation.
The drone strike on the kingdom’s state-owned oil company could, however, improve demand from more stable regions, and underscore the lack of pipeline capacity needed to sell Canadian crude globally.
Yemen’s Houthi rebel group claimed responsibility for Saturday’s attacks, which cut Saudi Aramco’s output by a massive 5.7 million barrels per day. The company has not given a timeline to resume full production.
The situation prompted U.S. President Donald Trump to approve the release of oil from the U.S. Strategic Petroleum Reserve to help mitigate the disruption. Trump also tweeted on Sunday that the U.S. remains “locked and loaded” as it determines responsibility.
Saudi Arabia oil supply was attacked. There is reason to believe that we know the culprit, are locked and loaded depending on verification, but are waiting to hear from the Kingdom as to who they believe was the cause of this attack, and under what terms we would proceed!— Donald J. Trump (@realDonaldTrump) September 15, 2019
The attack saw international benchmark Brent crude climb nearly 20 per cent to US$71.95 a barrel, staging the biggest intraday gain since the 1991 Gulf War. U.S. benchmark West Texas Intermediate (WTI) jumped as much as 15.5 per cent in response.
On Monday, the iShares S&P/TSX Capped Energy Index ETF (XEG.TO) climbed 9.05 per cent to $9.52 per share at 2:33 p.m. ET. Canadian Natural Resources Limited (CNQ.TO) added 12.04 per cent to $37.70, and Cenovus Energy Inc. (CVE.TO) jumped 12.95 per cent to $14.04 per share.
“You have big, big numbers coming across oil prices, which is going to have a beneficial uplift to Canadian producers,” Rory Johnston, a commodities economist at Scotiabank, told Yahoo Finance Canada. “That said, I don’t think the entire uplift is going the trickle through. The impact will be diluted before it gets back to Alberta.”
Johnston said Middle Eastern oil disruptions tend to have a greater impact on the price of Brent crude compared to WTI, due to geographical proximity. He adds that Canada’s lack of takeaway capacity via pipeline hampers its ability to backfill global losses.
However, he does see the largest strike thus far on Saudi oil assets as a reminder of Canada’s steadfast security stability among global energy-producing peers.
“On that basis, you will definitely get more interest in the Canadian oil patch from a security standpoint,” he said.
“In a worst case scenario, we’re talking about a month or two of reduced Saudi output. That will be a relatively short-lived boost to oil prices. The uplift for the Canadian energy sector on a security basis is much more of a long-lasting thing.”
Johnston said geopolitical risk has not been priced into oil as of late due to the “comfort blanket that U.S. shale has provided.”
Independent energy analyst Dan McTeague feels the energy market has been “sleepwalking for the past few months,” with U.S.-China trade tension overshadowing other systemic issues.
“If these two facilities can’t get back up to full production, and we are in the end of September or beginning of October, watch out,” McTeague said.
“We are going to be looking at tightness in supply. And Canada cannot take advantage of this crisis. It doesn't have the capacity to provide supply to make up the difference.”
Credit Suisse analyst Manav Gupta notes that “many unknowns” remain; including how long the Saudi outage will last and what, if any, geopolitical fireworks will follow the attack.
In a research note on Sunday, he compiled a list of Canadian companies with the greatest exposure to crude oil prices:
MEG Energy Corp. (MEG.TO)