OIL AND GOLD: A SHORT TRIP INTO THE STORM

Some of the Canadian energy stocks may see a price appreciation in a merger & acquisition activity if OPEC’s meeting on June 5 results in the continuing of keeping oil production stable. But if a decision is reached as to reduce the production ceilings and the non-members follow suite, one can then see a recovery of crude oil price up to 60 USD to 70 USD per barrel. This will give some room to the companies whose finances are not in good position with oil prices trading below 45 USD.

If this price appreciation does not materialize during the current year, the said companies will have to revise downwards the value of their assets thus narrowing the margin between the offer and the demand in the merger & acquisition activity. Of course, this very expectation is the fuel for the mergers & acquisitions activity.

Under these conditions, it would be logical to look for companies whose costs and debt levels are low but which have seen their share prices unreasonably depreciate to bargain levels.

As far as the mining industry is concerned, the drop in the metals prices prompted industry leaders to look for a rapid rebound by relying on China’s possible massive demand thus considering it as the ultimate solution to the industry’s current problems. But several monetary stimulus undertaken by major economic regions did not affect gold prices despite some expectation regarding a rise in the inflation.

The energy investors had parallel thoughts on the matter; the recent crash in oil prices had burst a bubble and investors expected that Saudi Arabia would solve the problem through production cuts but that was not the case. The Canadian and U.S. companies have expended vastly their production. And the energy prices had appreciated substantially by insufficient resources; now the process has reversed.

This was followed by the deterioration of the assets of the energy companies. In turn, they issued new shares and convinced the investors that the proceeds would be used to liquidate debt. On the other hand, the mining companies opted to wait for a recovery in the metals market for some time. But the current situation forces them to write down their overvalued assets thus incurring massive losses.  The prolonged downturn in the mining industry will also affect the low-cost producers, despite blue chip names and dragging their share prices to bargain levels. Then one will have to wait for substantially higher prices in order to see some improvement in the cash flow and debt levels of the said companies. But when?

The successful recovery of the oil industry depends on the extent of supply cuts which should be triggered by bankruptcies or shutdowns. This in turn may cause a temporary drop in the energy indexes but once the balance is restored, the current trend should reverse itself favorably. The long-term trend is favoring increases in the curve steepness in the price of oil thus a strong rally in the near-term commodity prices, say, this summer…

The next question would be the following:

Will oil price reach 80-90 USD level? Will gold reach 1550 USD level?