Expectations: Market Neutral

November 28, 2012

Highlights

As total crude oil supply grows at 4.9 million barrels per day compared to the demand growth of 5.5 million barrels per day in 2011 results in upside potential for the price of oil as producers attempt to meet the demand.
The geopolitical risks surrounding Iran and the possibility of closing the Strait of Hormuz which six countries ship 16 million barrels of crude oil per day to global markets results in increased volatility for the oil sector as a whole.
As countries power capacity increases and nations look to replace coal for cleaner methods of power generation, natural gas would be the logical source to replace it.
The energy sector strives at the end of the earlier stage of recovery and at the beginning of the later stage of recovery, for these reasons this sector is set up to benefit as the economy recovers.
Oil WTI Cushing forecasted to be $88-$92, based on World Economic Supply and Demand, and Natural Gas Henry Hub forecasted to drop to $3.10, and $3.30

Figure 1 - S&P/TSX Canadian Energy sector index (3 year)

Sector Overview

Energy sector generally consists of all industries involved in the production and sale of energy, fuel extraction, manufacturing, refining and distribution. According to the financial markets; the energy industry comprises of company stocks primarily related to producing and supplying of energy i.e. exploration and development of oil and gas reserves, oil and gas drilling or integrated power firms. Fuel is a major resource in the world and in the new world era everything runs on some form of energy, it’s important in the maintenance of society. Consequently when the industry is not performing well, not only do the companies feel the pressure to perform well but the economy as well.
This report will concentrate on the Canadian energy sector and its viability as a potential investment. According to the monetary report summary by Bank of Canada the global economic activity has slowed down from July 2012 as predicted. However, the report goes on to mention there is an expectation for slow growth in late 2012 and pick up to capacity in 2013. Figure 1 summary of the information above. This is believed to continue through to 2014. The energy sector thrives during the early stages of a recovery (near the end of the stage) and the late