Oil prices have experienced weakness in late 2018 due to geopolitical turmoil and surging U.S. production. The price gap between WTI crude and Wester Canadian Select (WCS) is hovering around $40. The Alberta oil patch is now in crisis mode, and Canadian energy stocks have been pummeled.
The iShares S&P/TSX Capped Energy Index ETF (TSX:XEG) rose 1.71% on November 29. Oil and gas prices enjoyed a bit of respite after a speech by U.S. Federal Reserve chairman Jerome Powell cast doubt on more rate increases in 2019. The ETF is down 21% in 2018 so far. Some of its top holdings include Suncor Energy (TSX:SU) , Canadian Natural Resources Ltd. (TSX:CNQ), and Imperial Oil (TSX:IMO).
Oil could conceivably receive another boost early next month depending on how a December 6 meeting in Vienna of the Organization of the Petroleum Exporting Countries shakes out.
Analysts and economists are projecting that OPEC will aim to cut production by 1 to 1.5 million barrels at this meeting. However, this move may still not be enough to combat the oversupply that has been driven by soaring U.S. production.
It is hard to see the Canadian oil patch climbing out of this crisis in late 2018. If oil prices continue to fall in 2019 credit ratings at major Canadian energy companies could be in jeopardy.
There will be intense pressure on the federal government, especially with an election looming next fall.
Until there is more clarity after the December meeting, investors should avoid broad exposure to the Canadian energy market.
