Drone strikes provoke soaring oil prices, but recovery is unlikely to keep pace with weak demand

Weekend attacks that have left more than half of Saudi Arabia's oil production pushed up crude prices, but investors still need to ask themselves a key question: can the recovery continue if world oil demand remains sluggish?

West Texas Intermediate crude, a benchmark in North America, jumped to 62.90 USD per barrel on Monday, up 8.05 USD or 14.7%, its largest percentage gain on a day since more than 10 years. Canadian heavy crude, which accounts for much of Alberta's output, rose more than 18% to $ 50.49, up $ 7.86.

Many Canadian energy stocks have generated impressive gains. Of the major integrated producers in Canada, Suncor Energy Inc. grew by 6.5% and Canadian Natural Resources Ltd. 12.8%. Among the intermediate producers, Encana Corp. increased by 16.3% and Baytex Energy Corp. 16.6%. And among the drillers, Precision Drilling Corp. increased by 8.7%.

But this recovery is likely to be skeptical for many investors, given the poor long-term performance of Canada's energy sector.

On Friday, before the attacks, the S & P / TSX Energy Index had dropped 25% over the last decade. Occasional rises during this period were interrupted by low crude oil prices, bottlenecks in exports, rising US energy production and lack of interest from the United States. foreign investors for Canadian oil assets.

Monday's 4.2% increase in the index was the strongest in almost three years. It would have been even stronger without the high weighting of crude oil pipeline stocks.

However, the factors necessary for the continuation of the energy recovery are complex, with investors weighing the severity of the attacks against Saudi Arabia against the slowdown in the global economy and declining appetite for crude oil.

The US Energy Information Administration, which has frequently reduced its forecast for oil demand throughout the year, is now expecting oil consumption to increase only 0.9 percent. million barrels per day in 2019, potentially marking the weakest growth since 2011.

"We have all been conditioned to assume that the major failures are optimistic for the crude oil market, and they are. But in an environment of weak demand, that complicates things, "said Michael Tran, chief executive of the RBC Dominion Securities Energy Research Team, in an interview.

An article published in June by the Oxford Institute for Energy Studies asserted that disruptions in oil supply tended to be resolved fairly quickly with the increase in production.

"Historically, the geopolitical episodes have not led to significant and persistent price increases, especially during periods of weak demand and abundant unused capacity," Bassam Fattouh and Andreas Economou told the paper. Mr. Fattouh could not be reached for a comment on Monday.

But a number of observers said investors should not reject Monday's rebound, which followed the largest supply disruption ever, according to Bloomberg.

Mr. Tran emphasized the importance of rising investor confidence, as money returned to an area showing signs of life. In addition, the energy market is facing permanent geopolitical risks, especially if the United States or Saudi Arabia react to weekend attacks.

"When we think of the weekend lesson, it's a lesson in vulnerability. Even if the current situation is normalizing quickly, the threat of putting nearly 6% of global oil production out of the way will no longer be hypothetical, "said Tran.

Rory Johnston, a commodity economist with the Bank of Nova Scotia, said there was essentially no political risk premium in the price of oil before the attacks. He now estimates that the risk premium is about 5 US dollars a barrel, assuming it takes several weeks in Saudi Arabia to resume production.

"If it's the worst case and it takes months to get back to full operational capability, we could easily have prices above $ 70 a barrel or more. [for WTI]"Said Mr. Johnston in an interview.

Some analysts jumped on the supply disruption with optimistic enthusiasm for a sustainable rally.

TD Securities analysts have argued that a $ 5 increase in the price of crude oil will generate much larger cash flows for Canadian energy companies. Estimated cash flow gains (per share) range from approximately 13% in the case of Suncor to 18% for Whitecap Resources Inc. and 55% for Pengrowth Energy Corp.

Ray Kwan, an analyst at BMO Nesbitt Burns, raised his price target for Crescent Point Energy Corp. from $ 6 to $ 8 before. Similarly, he expects the shares of Seven Generations Energy Ltd. to 8 USD per year, compared to 8 previously.

"We do not believe that Saudi Arabia's production capacity will be fully restored, but we nevertheless believe that a higher risk premium will be attributed to oil over the next 12 months," said M Kwan in a note.