Oil to remain strong in the near-term

(February 2006) Investors who enjoyed the massive upside to the energy rally were more than a little disappointed this past week, as the price of crude oil plummeted from over US$66 a barrel to $62, slashing 400 points off of the energy-heavy TSX Composite index.

Is the party over for the energy sector? It’s hard to imagine that prices will come down for oil, gas, coal or uranium, given that Mother Nature just isn’t making them as quickly as humanity can deplete reserves.

“It’s not that we’re running out of oil, natural gas, coal or even uranium for that matter. We’re running out of them at a cheap price,” says Jim Huang, vice president, Canadian Equities with Natcan Investment Management and manager of the Altamira Energy Fund.

In a recent report on the sector, CIBC World Markets reported that the world’s remaining oil and gas reserves may be so far out of reach that private enterprise on its own cannot afford to access them. This is where the Canadian oil sands come into play.

“There are no greater reserves accessible to private investment than the Canadian oil sands,” reads the report, penned by chief economist, Jeff Rubin and senior economist Peter Buchanan. “Deep-water wells may be the primary source of non-conventional production now, but by the end of the decade, slated production increases will make oil sands the single biggest contributor to incremental global supply.

“Planned capacity expansions in Canada’s oil sands even exceed planned increases in Saudi Arabia over the next decade.”

The report is critical of supply optimists, pointing out that depletion of reserves is often under-estimated or even ignored. Even the world’s largest oil companies are now expressing concern over depletion.

“Not only is depletion significant, but it is also accelerating, forcing more and more reliance on non-conventional sources of supply such as Canada’s vast but largely undeveloped oil sands,” Rubin and Buchanan write. “ExxonMobil has recently concluded that more than half of the hydrocarbon supplies needed over the next 15 years has yet to be developed.”

Based on their research, the CIBC team predicts oil will reach $100 a barrel by the end of 2007.

Maybe, says Huang, but the long term price of oil should be much lower even compared to today’s prices.

“The cure to high energy prices is high energy prices,” he says. “Given the right incentives, you’re going to find more supplies and that could potentially bring the price down. This will be corrected.”