Oil prices are sinking again as concerns about the health of the global economy and petroleum consumption replace fears about the vulnerability of Saudi Arabia’s energy infrastructure.
But at least one market strategist thinks the positive momentum seen in Canadian energy stocks over the past month can continue even with the pullback in recent days in crude oil prices, which are now nearly back to levels prior to the attack on oil installations in the Middle East on Sept. 14.
On Tuesday, oil prices fell more than 2 per cent as U.S. President Donald Trump fanned market fears that Sino-American trade tensions are far from settled amid continuing negotiations, a grim sign for oil-demand growth.
Mr. Trump sharply criticized what he called China’s unfair trade practices in a speech at the United Nations General Assembly, saying he would not accept a “bad deal” between the United States and China.
“He ratcheted up the U.S.-China trade war again,” said John Kilduff, a partner at Again Capital LLC in New York. “It wasn’t a constructive tone in trying to get that resolved, and we know how sensitive oil prices are to the back and forth.”
The U.S. President’s address left the oil market with the grim impression that “it’s not a deal that’s going to get done quickly,” which could continue to hamper global oil demand growth, said Robert Yawger, director of energy futures at Mizuho in New York.
Brent Crude futures, the international standard, settled at $1.67, or 2.6 per cent lower at $63.10 a barrel, while West Texas Intermediate futures ended at $57.29 a barrel, down $1.35, or 2.3 per cent. WTI was trading at $54.85 the Friday before the Saudi Arabia attack, which sent prices rallying nearly 15 per cent.
Reuters reported on Monday that Saudi Arabia had restored more than 75 per cent of crude output lost after attacks on its oil installations and would return to full volumes by early next week.
That has turned attention back to the demand side, and recent global economic data has painted a mixed picture about whether the global economy is flatlining or pulling out of the slowdown that hit during the second half of 2018 and the first half of this year.
The broadest indicators of business activity and investor sentiment continue to suggest an economy growing well below trend.
Global manufacturers reported that new export orders fell in August for the 12th month running and the decline is accelerating. The JPMorgan purchasing managers’ sub-index for new export orders last month fell to its lowest since the mid-cycle slowdown in 2012 and before that the recession of 2009.
World trade volumes fell during the second quarter compared with the same period last year at the fastest rate since the postcrisis recession, according to the Netherlands Bureau for Economic Policy Analysis.
Oil consumption among the top 18 consuming countries, each using more than one million barrels a day, rose by just 0.9 per cent in the second quarter compared with the same period in 2018.
Oil consumption by the top consumers was growing well below the trend rate of 1.5 per cent a year that prevailed between 1998 and 2018, data from the Joint Organisations Data Initiative showed.
In the United States, new orders for non-defense capital goods excluding aircraft, a proxy for business investment, were up less than 0.5 per cent in the May-July period compared with a year earlier.
Business investment spending was growing at the slowest rate since the mid-cycle slowdown or mini-recession of 2015-16 and well below the average rate over the past 20 years.
Canada’s energy resurgence could persist
The heightened political risks arising from the attack in Saudi Arabia helped to reawaken Canadian energy stocks this month. The S&P/TSX energy sector is up about 11 per cent over the past month, outperforming gains of nearly 8 per cent in the price of West Texas Intermediate crude.
In the longer term, Canadian energy stocks still have a lot of catching up to do, says Brian Belski, chief investment strategist of BMO Capital Markets. WTI is up more than 28 per cent year to date and energy stocks are up only 12 per cent.
“Indeed, energy stocks have been underperforming their fundamental underpinnings for some time with valuations at or near record lows on both an absolute basis and relative to the broad market,” Mr. Belski said in a note. “As such, we believe the energy stocks have room to continue to outperform over the next few quarters, even if geopolitical risks subside.
“Furthermore, when we look at historical monthly spikes in WTI, our work shows energy stocks can in fact maintain momentum three, six and even 12 months after these outsized moves in oil prices,” he said.
Mr. Belski adds that fundamentals have significantly improved among Canadian energy names in recent years. Valuations are at or near record lows, profitability is back to historical averages even at current oil prices and cash generation is strong.
Reuters, with files from Globe staff