No doubt, many of you have had sticker shock these last couple of weeks if you went to gas up your vehicle. Depending on where you live, regular unleaded prices have vaulted above $1.60/litre and are just pennies above diesel. Once we get past both the Canadian and U.S. May holiday weekends, we typically see gasoline prices push higher as the summer driving season gets underway.  What is unusual is that squeeze on the wallet is happening at the same time that crude oil prices are floundering, which is making for some sad and frustrated bulls in the energy patch.

 

 

The chart above shows the average price of gasoline across Canada on a daily basis.  This week, we moved above $1.65/litre – coming close to the $1.68 high seen on April 19^th.  The 30-day moving average has been above $1.60 since April 28^th and the upward trend of late was captured in the April CPI report, where energy prices rose 3.4%. It is doubtful that prices will get back to levels from last October, which were just under $1.80 and it is extremely unlikely that we will return to the $2.10 neighbourhood from last June. Part of the reason is that gasoline futures are already in decline after hitting a peak last week, and are well below the levels reached in April. The other reason is that crude prices are down.

 

 

Back at the start of the year, it looked as though WTI futures had put in a solid floor around US$70/barrel, after dropping more than $50 from the peak in 2022. The pullback was consistent with the unwinding from supply distortions created by things like Russia’s invasion of Ukraine and expectations of slower growth in the wake of higher interest rates. After risk assets stabilized late last year and into 2023, many believed that a gradual uptrend in crude would take shape this half. The U.S. banking mini-crisis in March jolted that belief, as futures moved below $70. The after-shock from that event also started to fade, allowing oil to head to $80. Problem  over, or so we thought.

 

We have since tested twice below the $70 threshold, and we now in a similar boat to earlier this year – only that support is down in the $61-63 area.  On March 20^th, we bounced off $64.10 and touched $63.60 in the first week of May. After the 2020 recovery, the $60 floor has held and bulls expect to hold this year as well. Getting a debt ceiling package passed by the weekend will help, but there are other variables at play.

 

 

To begin with, Chinese economic data continues to lag expectations.  Purchasing managers’ index (PMI) for the month of May showed a continued contraction in manufacturing, with the index dropping to 48.8 from 49.2 in April (anything below 50 is technically a contraction). The emergence from the covid lockdown is taking place at much slower pace than economists had predicted, at least in the good-servicing segments of the economy. Non-manufacturing PMI is holding above the 50 mark, but also moderated this month and the net read by markets is that things are too slow to provide adequate support for crude. On the plus side, consumer spending did rally back in the first quarter and the most recent price indicators suggest that demand is still healthy. Beijing is also providing some support through its monetary policy levers and bolstering credit conditions. The coming weeks will tell us how successful these measures will be.

 

The other wild card is OPEC. This weekend, officials from the organization meet in Vienna for the regularly scheduled deliberations on prices and production. Recently, some members have expressed their dissatisfaction with where crude is trading and there have been public remarks suggesting that short oil positions may prove painful. That suggests that certain members are going to push for production cuts at this weekend’s meetings, though getting news on what happens may be a little more difficult than usual, given that Bloomberg, Reuters and the Wall Street Journal have not been invited to cover the gathering. In my opinion, the fact that Brent futures are bouncing along at just over $70, and the risk of a breach on any further negative economic news, raises the probability of a production adjustment.

 

Finally, we have the dynamics of monetary policy in North America. If a debt deal happens by this weekend, then one negative element hanging over the economy will be removed. However, if there is a rally in equities and this somehow flows into improved business and consumer confidence, then this could prompt central banks to not only keep their feet on the brake pedal, but perhaps push down a little harder. Initially, this doesn’t necessarily mean crude prices will tumble further and a risk-on tone could indeed take WTI back up above $70 and potentially towards $80. The medium-term outlook would become negative if we actually did see further tightening in policy and bears would point to the 2019 slowdown as an example of where crude might settle in at.  In other words, down in the $50 area.

 

 

So, what does this mean for energy stocks? In terms of the TSX sub-group, we have seen north of a 7% pullback since the start of the year and only 9 of the 40 members were showing gains as of mid-week, but that includes uranium-producer, Cameco. The worst 10 performing stocks range from Birchcliff Energy, with a 19% loss, to Precision Drilling, which is down close to 45%.  The sector as a whole has done better than the 15% decline seen in crude oil, not to mention the 50% slump in the natural gas prices.

 

During this erosion in valuations, Ally and I have maintained exposure to Enbridge and TC Energy, where healthy dividends have helped to soften the impact in terms of total return. Even though Enbridge has dropped more than 9% since the start of the year, its return including reinvested dividends has been close to minus 6%. The sustained break below $50 in the second half of May has eroded sentiment, however, the more critical test is at the $47 low seen back in December. TC Energy’s stock price is down roughly 2% since the start of the year, but its total return is close to minus 0.4%. 

 

The underperformance by the TSX relative to the broad U.S. market and even Europe, as I have mentioned before, is not only the smaller weighting to tech, but the higher concentration in financials and energy – the two worst sectors in our market. Both represent value in our opinion, as well as a source of dividend growth in the portfolio.

 

On behalf of the Pyle Group, have a wonderful weekend.   

Andrew Pyle

 

CIBC Private Wealth consists of services provided by CIBC and certain of its subsidiaries, including CIBC Wood Gundy, a division of CIBC World Markets Inc. “CIBC Private Wealth” is a registered trademark of CIBC, used under license. “Wood Gundy” is a registered trademark of CIBC World Markets Inc. This information, including any opinion, is based on various sources believed to be reliable, but its accuracy cannot be guaranteed and is subject to change. CIBC and CIBC World Markets Inc., their affiliates, directors, officers and employees may buy, sell, or hold a position in securities of a company mentioned herein, its affiliates or subsidiaries, and may also perform financial advisory services, investment banking or other services for, or have lending or other credit relationships with the same. CIBC World Markets Inc. and its representatives will receive sales commissions and/or a spread between bid and ask prices if you purchase, sell or hold the securities referred to above. © CIBC World Markets Inc. 2023.CIBC Wood Gundy, a division of CIBC World Markets Inc. Insurance services are available through CIBC Wood Gundy Financial Services Inc. In Quebec, insurance services are available through CIBC Wood Gundy Financial Services (Quebec) Inc.

The CIBC logo and “CIBC Private Wealth” are trademarks of CIBC, used under license. “Wood Gundy” is a registered trademark of CIBC World Markets Inc.

These are the personal opinions of Andrew Pyle and the Pyle Group and may not necessarily reflect those of CIBC World Markets Inc.

 

Birch cliff Energy Ltd (2g)

2g CIBC World Markets Inc. expects to receive or intends to seek compensation for investment banking services from this company in the next 3 months.

 

Precision Drilling Corporation (1b, 2a,2e,2g)

1b CIBC WM Inc. makes a market in the securities of this company.
2a This company is a client for which a CIBC World Markets company has performed investment banking services in the past 12 months.
2e CIBC World Markets Inc. has received compensation for investment banking services from this company in the past 12 months.
2g CIBC World Markets Inc. expects to receive or intends to seek compensation for investment banking services from this company in the next 3 months.

 

Enbridge Inc. (1b,2a,2c,2e,2g,7)

1b CIBC WM Inc. makes a market in the securities of this company.
2a This company is a client for which a CIBC World Markets company has performed investment banking services in the past 12 months.
2c CIBC World Markets Inc. has managed or co-managed a public offering of securities for this company in the past 12 months.
2e CIBC World Markets Inc. has received compensation for investment banking services from this company in the past 12 months.
2g CIBC World Markets Inc. expects to receive or intends to seek compensation for investment banking services from this company in the next 3 months.
7 CIBC World Markets Corp., CIBC World Markets Inc., and their affiliates, in the aggregate, beneficially own 1% or more of a class of equity securities issued by this company.

 

TC Energy Corporation (2a,2c,2e,2g,7)

2a This company is a client for which a CIBC World Markets company has performed investment banking services in the past 12 months.
2c CIBC World Markets Inc. has managed or co-managed a public offering of securities for this company in the past 12 months.
2e CIBC World Markets Inc. has received compensation for investment banking services from this company in the past 12 months.
2g CIBC World Markets Inc. expects to receive or intends to seek compensation for investment banking services from this company in the next 3 months.
7 CIBC World Markets Corp., CIBC World Markets Inc., and their affiliates, in the aggregate, beneficially own 1% or more of a class of equity securities issued by this company.

 

Cameco (2a,2c,2e,2g)

2a This company is a client for which a CIBC World Markets company has performed investment banking services in the past 12 months.
2c CIBC World Markets Inc. has managed or co-managed a public offering of securities for this company in the past 12 months.
2e CIBC World Markets Inc. has received compensation for investment banking services from this company in the past 12 months.
2g CIBC World Markets Inc. expects to receive or intends to seek compensation for investment banking services from this company in the next 3 months