‘Extreme selling’: Canadian oil stocks tumble on Venezuela production fears, then slightly recover
Stock prices for Canadian oil companies were down by as much as eight per cent on Monday after the United States captured Venezuela’s leader over the weekend, but investors say it was a “knee-jerk” reaction that’s unlikely to last.
Barry Schwartz, chief investment officer with Baskin Wealth Management in Toronto, said stock markets are quick to react to surprising news, but are often wrong.
“Usually, the first take on the markets is generally the wrong one,” Schwartz said, adding, “it’s a naive take.”
Eric Nuttall, a Toronto senior portfolio manager and partner with Ninepoint Partners LP, said some investors might have been shooting in the dark on Monday.
“We saw extreme selling,” Nuttall said. “I think this was the heaviest volume in several years, despite many investors either still being stuck on a beach or just having returned. I think (Monday) was kind of a shoot first, ask questions later.”
The fear that rattled markets was that the U.S. could lead an effort to rehabilitate Venezuela’s oil operations after capturing President Nicolas Maduro, whose country has the world’s largest proven oil reserves.
If the U.S. lifts sanctions on the South American country, Venezuela could compete with Canada in supplying the United States with heavy oil, potentially undercutting the value of Western Canadian crude in the process.
This fear hit Canadian oil companies hard on Monday. Shares of Cenovus Energy Inc. and Canadian Natural Resources Ltd. were down by seven per cent at one point but recovered slightly before the end of the trading day.
But Schwartz said markets failed to account for the many unknowns that come with Venezuela’s new regime.
“We’re so ahead of ourselves in terms of figuring out (the) geopolitical future (of Venezuela),” Schwartz said.
“If you look at the history of this kind of stuff, it’s never good,” he said.
Chief investment officer of Brompton Funds, Laura Lau, also expressed concerns over Venezuela’s near future and its implications for the oil market.
“(In) Iraq, the amount of oil produced tripled since Saddam Hussein has gone. And, for Libya, it’s gone down substantially. So which path will (Venezuela) follow?” Lau said.
“I think the market is assuming that more oil will come out of Venezuela, and I think that will happen. The only question is when?”
After two decades of neglect, the state of Venezuela’s oil operations is not clear, but preliminary predictions indicate that increasing the country’s oil exports is going to take billions of dollars and several years, conflicting with the initial market reaction.
Lau also pointed out that there are legal questions standing in the way of energy investment in Venezuela.
“Who would even sanction a new oil contract? Is this (Venezuelan) government even legitimate enough to sign an oil contract?” asked Lau.
The safety factor
And then there’s the safety concerns of any oil company workers should any operations get funded — a bar that Nuttall said is set high.
“The bar of safety is extraordinarily high,” he said. “How can an oil company send workers down to a country with just enormous security risks? I just can’t even fathom the guarantees and the boots on the ground necessary to assure the safety of employees at a large scale. So that’s a huge challenge.”
According to Nuttall, the path to more oil production in Venezuela is measured in years, not months.
“I think people will come to realize that the timeline to rehabilitate Venezuelan production is measured in many years, not days or weeks or quarters,” he said. “And the U.S.’s ability to displace Canadian oil from the refining complex is either extremely difficult or outright impossible.”
Schwartz said Canadian oil stocks will likely recover over the next few weeks and months as investors continue to buy and sell. Notably, prices for North American oil and Western Canada’s heavy crude remained relatively flat, if not slightly up, despite the news out of Venezuela.
However, even if the immediate threat of more Venezuelan oil subsides, Lau emphasized the need for Canada to double down on oil while it has the advantage.
“We do need another oil pipeline,” Lau said. “We don’t need it today, but by the time it’s built, we will need it. It is a race to get those barrels out to the market, because Venezuela, they have a lot of infrastructure, like the shipping and everything, the oil is cheaper and easier to get out.
“But their disadvantage is the chaos in Venezuela right now. So, we have a window.”
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