The Market, The Price of Oil, And Saudi Arabia, Canada, and Bakken Investors

With regard to the price of oil, one of three things will happen:

• the market recovers, continues an upward trend
• finds a new trading range, near where it is now
• continues to trade down

With regard to investors in the Bakken, this is the hierarchy: Saudi, Brent, WTI, Bakken, Canadian Sands oil. I might have the first three for four in the wrong order, but the point is this -- even before the fall in the price of oil today, producers in Alberta were anxious. Today's fall makes them that much more nervous.

Canada, the country, has to be very, very nervous. Just yesterday, the article asking whether the Canadian economic miracle was over. If Canada had problems yesterday, it has bigger problems today.

Earlier this month, April 3, 2013, I posed the question: even if the Keystone XL is approved this month (which, of course, it won't be), will it be too little, too late? If on April 3, 2013, that question had validity, it has even more validity as the price of oil plummets.  At the April 3, 2013, linked post, there is a link to a great RBN Energy article regarding Canada's situation.

So, from two different sources, about two weeks apart we have these two dots: a) the article yesterday asking whether the Canadian economic miracle was over; and, b) two weeks ago, RBN Energy pointing how out dire the Canadian energy situation is. A one-two punch, perhaps?

For the US, the oil industry is a big component of the economy, but, still, it is just one part of a pretty well-diversified economy. For Canada, not quite the same can be said. For Canada, the energy industry is a huge component of the Canadian economy, especially the export market. From wiki:

Canada is one of the few developed nations that is a net exporter of energy - in 2009 net exports of energy products amounted to 2.9% of GDP. Most important are the large oil and gas resources centred in Alberta and the Northern Territories, but also present in neighbouring British Columbia and Saskatchewan. The vast Athabasca Oil Sands give Canada the world's third largest reserves of oil after Saudi Arabia and Venezuela according to USGS.

[Interestingly, if the drop in price is for a short period of time, US oil companies may actually do better due to contracts, hedges, floors, ceilings, etc., of which I have a sense of how they work but not the resources to analyze or forecast what price changes on a short term basis mean for the oil industry.]

As usual I digress. Where was I? Oh, yes. If the drop in the price of oil has a Bakken-centric investor worried, think what the drop in the price of oil means to Canada -- and not just Canadian investors investing in Canadian oil, but the entire economy.

One could stop there, but if the oil industry is a significant part of the American economy, a bigger piece of the Canadian economy, is the oil industry even a bigger component of any other country? Yes, several: I can think of three countries immediately that are of interest to many readers: Venezuela, Iraq, and Saudi Arabia, and possibly a fourth, Mexico.

Venezuela is in deep trouble; it's not going to weather a prolonged drop in the price of oil very well. Iraq, Mexico, meh.

Saudi Arabia? Ah, there's the rub. Their production is down, and if the price of oil stays down for a protracted period of time? The one-two punch, again (see Canada, above). Volume x price = revenue.

Bottom line:

• Saudi Arabia: hustling, worried
• Canada: in very deep trouble, and when it comes time to blame someone, it may be the US (right or wrong); and the approval of the Keystone, if it comes at all, will be too little too late.
• Bakken investors: worried; but opportunities abound

Disclaimer: this is not an investment site. Do not make any investment decisions based on what you read here or what you think you read here.