To begin, let's just say there's little hope of traders and funds bailing out of their long crude positions until there's a genuine turnaround in the Libyan picture, and NATO proves itself ready to conquer Sir Nutman Qaddafi decisively. The longs have the momentum at this point, and with few willing to take the opposite side of the trade, we'll likely continue to see upward pressure on oil.
The only other event we could imagine triggering an oil unwind is a breakdown in the equity market, with oil speculators selling the prospect of a broad based economic downturn.
Beside that, there's only one other data point that could significantly impact oil prices on the downside, and that's Chinese demand. Take a look here at an overlay of the latest Chinese rate hikes against the state-controlled retail price of diesel and gasoline.
The price of gas has tracked interest rates higher for the last half year, and we feel the latest (and biggest) hike will begin to bite both retail motorists and businesses in a significant way. Moreover, with Chinese demand accounting for a full 40% of growth in global oil demand, the oil bears now have a prodigious arrow in their quiver.
That said, we don't believe this price rise (or any future rise) will be enough to sour traders on their current long contracts, but we do believe that the above chart will be cited widely when and if a crude correction begins in earnest. And the effect will likely be to a accelerate the selloff appreciably, further roiling equity markets and sending small crude traders home with their teeth in Ziploc baggies.
We'd pull the trigger early on all oil trades as soon as prices begin to turn south.
The Price of Oil in China
The Chinese are not indifferent to their growing need for oil, of course, and to that end their national oil companies, China National Offshore Oil Corporation, Petro-China and Sinopec, have been actively investing in safe assets with strong futures that can weather geopolitical storms and that will benefit exponentially from new extraction technologies.
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That's led them to Canada's oil sands, where they recently purchased a big chunk of Syncrude Canada, which operates the largest single source of oil in Canada, producing more than 111 million barrels annually. This acquisition adds to a growing portfolio of Canadian projects, including two producing properties bought from Athabasca Oil Sands Corp., a large property once owned by French giant, Total S.A., called Northern Lights, a joint venture deal with Penn West Energy that will exploit the latter's significant assets in the Peace River Basin and a 17% stake in a private concern known as MEG Energy Ltd. China has also purchased a great many leases on properties that have yet to be developed in both Alberta and Saskatchewan.
The Canadians, of course, are thrilled with China's nascent interest, as it makes up for recent American reluctance to invest in the area over environmental concerns.
Whether the U.S. re-enters the oil sands in a meaningful way, or just pressures the Canadians to stop selling important assets to the Chinese remains to be seen. But it's got to be one or the other. The U.S. is none too happy about Chinese interest in Alberta, but they're also reluctant to get involved in any project that might produce an environmental SNAFU. There's been one too many of those in recent years.
China's Natural Partner
Canadian Natural Resources (NYSE:CNQ) is one of the oil sands' biggest players. Its Horizon mine alone has 110,000 barrels/day capacity now onstream, with another 122,000 expected by year end from its 'Horizon 2/3' expansion. The company's Primrose property produces an additional 100,000 barrels a day.
CNQ's properties rely upon 'Steam Assisted Gravity Drainage' (SAGD) techniques to extract their oil, a process that also uses significant quantities of natural gas to get product to ground level. Here's what it looks like:
But the expanded Horizon project will be exploiting a newer range of technologies that should enhance the recovery process and, according to our sources, likely bring a bid for the project in the near future.
CNQ was likely preparing for this when they hired the Canadian arm of Sinopec to participate at every level of the Horizon expansion.
Technicals look constructive on the weekly chart, too:
A two year rising channel still in play. All technicals currently bullish.
1) It's an oil sand play with 2) an enhanced recovery angle and 3) a takeover twist, all-in-one.
Many happy returns,
Matt McAbby, Senior Analyst, Oakshire Financial
