Canadian energy stocks ride high on pipeline, OPEC decisions

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Canadian energy stocks ripped to fresh highs Wednesday as OPEC set a new course for the global oil market, a day after the Canadian government bolstered the sector by approving two major pipeline projects.

Combined with a rising consensus economic forecast, market forces have swung in support of the energy-market recovery.

"The headwinds are now being outweighed by the opportunities," said Rafi Tahmazian, portfolio manager at Canoe Financial in Calgary.

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"All of these things are powerful positives, which have taken a lot of pressure off of the oversupply."

Canadian oil and gas stocks reacted forcefully Wednesday, with the S&P/TSX capped energy index gaining 8 per cent on the day to reach its highest level in a year and a half. All 39 names in the index were in positive territory.

That rally roughly matched the movement in crude oil itself. West Texas intermediate rose to as high as just shy of the $50 (U.S.) mark after the Organization of Petroleum Exporting Countries announced its first production cuts in eight years.

Two years after the oil cartel triggered the long descent in crude prices by refusing to limit production, a surprise deal out of Vienna will see 1.2 million barrels a day cut from its current output.

"If OPEC is able to adhere to these quotas, it would help to reduce the glut that has plagued the market over the last two years," TD economist Dina Ignjatovic said in a note.

The announcement seemed to spur a recovery in the global oil market that has been sporadically unfolding over the course of the year.

After the oil crash hit its low point in January, the price of crude doubled, then traded within the $45-$50 range over the past six months.

But there was little in the way of concrete development to drive the commodity higher over that time, Mr. Tahmazian said.

"It was all speculators and short covers and rumours," he said. "This is one of the first big tangible things we've seen for our sector since the meltdown [started] in 2014."

Now, reality is catching up to market speculation, Mr. Tahmazian said.

Progress from OPEC, however, doesn't yet seem to be fuelling much of a change in crude forecasts. TD said it is expecting a range of $45 to $55 over the next year.

The Bank of Montreal is sticking with a similar outlook, analyst Randy Ollenberger said.

"The importance of what we've seen today is that it will give investors comfort that there is a floor price," Mr. Ollenberger said. "They've signalled that they don't want to see the oil price go back below $40."

There are many fund managers, both in Canada and elsewhere, who have largely taken a pass on the energy rally and remain underweight in oil and gas stocks.

"They're concerned about the risk of oil prices slipping back. If we've taken that away, you could see incremental buying in the space," Mr. Ollenberger said.

The OPEC deal helps reduce the risk of certain energy names, particularly those most leveraged to the price of the underlying commodity, he added.

Some of Wednesday's biggest stock moves were among companies heavily concentrated in exploration and production – Cenovus Energy Inc. and Canadian Natural Resources Ltd. rose by 10 per cent and 9 per cent, respectively.

Pipeline stocks, on the other hand, were some of the sector's calmer names on the day.

On Tuesday, Prime Minister Justin Trudeau approved Kinder Morgan Canada Inc.'s Trans Mountain pipeline expansion and Enbridge Inc.'s Line 3 to the U.S. Midwest.

It was a "monumental event, but don't expect much of a share-price reaction," Raymond James analyst Chris Cox said in a research note. The announcement was largely in line with market expectations, he said.

Still, the pipeline approvals should help companies make their cases for new oil-sands projects, Mr. Cox said. Plus, "we do see positive implications for investor sentiment with respect to the Canadian large cap producers in the context of an eventual oil-price recovery."