Financial Relief for the Markets! Your Money September 15th, 2023

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We had a cornucopia of factors affecting markets this week. In no particular order, we believe investors reacted with mixed emotions over the auto strike, spiking inflation, rising oil prices, and slightly improving economic activity in China. In Canada we note the rally in bank stocks this week that got no love from earnings last month and pray it is not a dead cat bounce. Speaking of no love, crude oil broke through $90 but oil stocks on both sides of the border could not give their stock away or so it seemed. We of course have been closet bulls for over a year and think prices will continue to climb higher as North American supplies inch lower and lower while demand edges upwards.

Investors need to know that there is a bit of mismatch in North America that needs a brief explanation. We understand that prior to the last fracking boom, growth in oil production came from heavy, sour crude supplies (think of it as warm peanut butter in consistency and high in sulphur) which required major investments by refiners to handle and refine it. Then suddenly (ok over a few years) fracking technology accessing tight shale formations exploded to the upside creating a tidal wave of light, sweet crude. If memory serves correct, it under pinned the end of a 40-year ban on US Crude oil exports in 2015. It was bit of a win for the oil producers. If they sell their oil to US refineries, the price is based on West Texas Intermediate (WTI), but if they export their light, sweet crude, they access Brent pricing which typically trades at about a 10% premium to WTI.

So where does that leave the oil producers? US producers are once again tapping shale oil fields, but the refiners prefer the heavy sour production. In an ideal world, both Canada and the US would build more refineries geared towards light sweet crude, but you would need to believe in the tooth fairy and the easter bunny too. Meanwhile OPEC, led by Saudi Arabia, have discovered a once in a generation opportunity to capitalize on production mismatches, rising environmental barriers and an ever-increasing global population base. Why do you think Enbridge spent $14 Billion dollars buying pipeline and processing facilities last week. They are spending hundreds of millions of dollars trying to get approvals for more pipelines only to be stymied at every turn. We cannot wait for a significant shutdown of a major pipeline system because it will likely take a crisis of epic proportions aka no heating oil in January to change consumer psychology for the need for the safe transportation of energy products. But we digress.

We believe US oil companies will continue to export their growing light oil production resulting in excess profits for shareholders. In Canada the situation is not much different. According to a Global news report last month, the latest estimate for the TML pipeline will hit $30 billion dollars. Kinder Morgan is laughing all the way to the bank after selling it to the Canadian Government for $5.4 Billion back in 2018. It should be an economic scandal of epic proportions and worthy of a Federal investigation but…

Unfortunately, it has trapped valuable resources that could have been sold into international markets, the taxes on which would go a long way towards helping our medical, educational, and housing crisis. And don’t get us started on the LNG plant in Kitimat. According to gas link the price tag has soared to $14.5 billion dollars. Investors and consumers need to realize in an ideal world, those LNG exports could go a long way to replace the burning of coal and firewood in Asia. But given the price barrier, don’t expect any additional facilities being built anytime soon.

By comparison, Australia exported 81 million metric tonnes of LNG earning the industry $92 billion dollars in 2022. Our loss is their gain. Still, investors need to realize Canadian oil and gas companies operate with some of the best environmental processes and support diversity in its labor practices.

Turning to next week, we do not believe there will be a solution to the UAW strike and in likelihood will see expanding picket lines leading to supply shortages and rising auto prices. In a worst-case scenario (and given President Biden’s support it’s a distinct possibility) a prolonged strike would lead to consumers switching to auto imports, leaving a profit hole in the income statements of Ford, GM and Stellantis.

Last but not least, investors need to factor in an interest rate decision by the US Fed on Wednesday. The current guestimate is for them to stand pat even though the ECB raised by a quarter point yesterday. However, they will leave the door wide open to further hikes especially if inflation rates continue to rise and we think they will. That may put a damper on a rally next week.

Steve Bokor and the Ocean Wealth Team.

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Steve Bokor

Steve Bokor

Portfolio Manager