The Conundrum of the Energy Sector

Stock Market Outlook

In early October, we published our Quarterly Market Outlook and in our last Strategy Note, we pointed out the encouraging fact that the Economic Cycle Research Institute (ECRI) Weekly Leading Indicators had reversed to the upside over the preceding four weeks. That reversal has now carried through to the upside for a further two weeks. To recap: the WLI hit their fastest growth rate at +11.9% at the beginning of February this year but then declined steadily to a low of 0% seven weeks ago before recovering steadily to +3.2% in the latest reading.

As we have pointed out before, 90% of bear markets over the last 50 years have been associated with recessions. In almost all cases, U.S. recessions are associated with a reading for the WLI of -10%. Thus, the reversal in the ECRI to the upside is reassuring in that it suggests that there is little likelihood of a recession in the U.S. until the second half of 2018 at the earliest. With the normal cyclical lag for the TSX, we are hopeful that we could see some very satisfactory gains over the next year in the TSX. As mentioned at the beginning of November, our conservative target for the TSX has been 16,000 (a level recently exceeded) but we suggested that this could well prove to be quite conservative if the 2017 year end oil price moves back to the $60 plus area a barrel. We still believe that global oil inventories are falling rapidly to normal levels and, assuming that Organization of the Petroleum Exporting Countries’ November meeting results in agreement to keep current production quotas through to the end of March, we would be much more confident that oil could move well past $60 a barrel over the next few months. Also, it appears that there is virtually no political risk premium built into the current price and recent arrests in Saudi Arabia of Princes and wealthy individuals suggest that some such premium could occur.

The recent rise on the oil price to the high $50’s has not been matched by the Canadian oil and gas stocks. This Strategy Note will review what has been happening in the Canadian oil and gas sector and the potential opportunity that exists although it would not be apparent from the year-to-date action of the stocks.

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