Canadian oil producers a long way from $100 oil

Mon Jan 7, 2008 4:01am EST

By Jeffrey Jones

CALGARY, Alberta (Reuters) - World oil prices have broken the magic $100 a barrel mark but Canadian oil producers will have to wait for much of their own fast-growing but lower-quality production to fetch such a lofty sum.

More than 40 percent of western Canadian oil is classified as heavy, and so it is slapped with varying price discounts to benchmark West Texas Intermediate to account for the extra processing it requires and other market forces.

Recently, the discount has been steep.

"Overall, as world crude prices increase, so do the prices here, but they are fully dependent on what that differential is," said Steve Fekete, a Calgary-based analyst with consultants Purvin & Gertz.

In December, the spread between WTI, the marker grade for the New York Mercantile Exchange, and Western Canada Select, the region's blend of heavy oil, averaged a gaping $40 a barrel, Fekete said.

A BP Plc (BP.L: Quote, Profile, Research) refinery in Toledo, Ohio, a major buyer of Canadian heavy oil, completed a lengthy maintenance shutdown last month and pipeline space allocation issues also affected the market in December, he said.

Today, the discount is about $25 a barrel.

Canada is the largest oil supplier to the United States, topping such others as Saudi Arabia and Venezuela, and companies are in the midst of a spending spree to retool refineries to run more heavy crude, especially in the Midwest.

That is in concert with the expansion of Canadian oil sands output, a pricey and technically difficult effort that now involves most of the world's oil majors. It has brought with it investments in new pipelines and blending techniques to make the bitumen from the oil sands more versatile as a feedstock.

According to National Energy Board estimates, Canada produced about 2.8 million barrels of oil a day in 2007. Of that, 1.02 million was heavy oil or extra-heavy bitumen from Alberta's oil sands, and another 707,000 was upgraded bitumen from Syncrude Canada Ltd, Suncor Energy Inc (SU.TO: Quote, Profile, Research) and Royal Dutch Shell Plc (RDSa.L: Quote, Profile, Research) oil sands plants.

A series of operational mishaps at upgrading plants run by the oil sands producers in late 2007 pushed up prices for the synthetic crude.

Newfoundland's three offshore projects, Hibernia, Terra Nova and White Rose, produced 388,000 barrels a day.

That leaves just over 500,000 barrels of light oil production, the highest quality crude, in Western Canada, and that number is projected to keep dropping as reserves are tapped out.

This week, benchmark light oil hit, then topped, $100 a barrel for the first time, driven by a combination of falling inventories in the United States, the world's biggest consumer, and geopolitical tension.

It settled down 44 cents at $99.18 a barrel on Thursday, but many analysts do not expect upward pressure to ease soon.

Much of Canada's heavy crude will likely fetch 65 percent to 70 percent of price, due to the lower quality and high fixed costs, EnCana Corp (ECA.TO: Quote, Profile, Research) spokesman Alan Boras said.

His firm produces 134,000 barrels a day of crude, some of it as part of an oil sands production and refining joint venture with ConocoPhillips (COP.N: Quote, Profile, Research), aimed at matching supply with markets. Others firms have forged similar deals.

"We have thick, heavy barrels that are buried in sand, and they need a lot of capacity and capital investment to get them out, additional blending to get them to market and then we're a ways away from those markets, so there's transportation on top of that," Boras said.

"So $100 isn't exactly as it appears."

(Reporting by Jeffrey Jones; Editing by Rob Wilson)

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Girding for bear market

MICHAEL STUPARYK/TORONTO STAR

Bay Street bear David Chapman, a technical strategist with Union Securities Ltd., thinks the S&P/TSX composite index could fall as low as 10,500 this year from its current 13,778.58.

Dismissed as a curmudgeonly naysayer by peers with a more bullish outlook, stock market bear David Chapman says there's no room for 'nuance' when the TSX is set to take a massive dive

January 05, 2008

Rita Trichur
Business Reporter

Meet one of Bay Street's biggest bears.

David Chapman, an outspoken investment adviser and technical strategist with brokerage Union Securities Ltd., is a consummate gold bug who has ruffled more than a few feathers over the years with his doom and gloom forecasts.

He admits that being "ornery" and "contrarian" has often been his gimmick. Nevertheless, some of his calls have been right on the money.

Now he says the time has come to talk turkey about the global credit crunch and the uncertainty plaguing financial markets. His advice for investors? Fasten your seatbelts, folks, because Toronto's S&P/TSX composite index could plunge to 10,500 some time this year. That is even as gold prices appear set to soar to $1,000 (U.S.) an ounce.

"I get accused of being and have been called a `perma-bear.' I've been called all sorts of names," Chapman said in a recent interview from the home office where he has worked since the late 1990s. The space is tight but the commute is short.

Surrounded by a jumble of papers, books and newspapers, he hunkers down each day using charts as the basis for his technical analysis of market movements.

Chapman is intensely passionate about his work but for the novice investor, his methodology can be hard to follow. As a result, he breaks it down like this: "Charts tell you where you've come from and can give you clues as to where it (the market) is going just by looking at a picture."

And when it comes to the nitty-gritty of technical analysis, he explains that only 14 basic patterns exist. All the rest are variations.

Chapman concedes that not everyone buys his prediction that the S&P/TSX composite index, which has enjoyed a five-year bull run, could sink to a potential target of 10,500 this year. Poised to lead the decline are financial stocks, along with consumer, industrials, information technology and real estate issues, he said.

There are, however, no guarantees. It largely depends on how steep the correction gets. "A breakdown down below 13,400 will help target 10,500 for me," he said.

Yesterday, the S&P/TSX composite index fell 199.62 points to close at 13,778.58. It ended 2007 with a 7 per cent gain, a far cry from the double-digit returns generated in recent years. And while more subprime fallout is expected this year, many of Chapman's peers have more bullish outlooks.

Bob Gorman, chief portfolio strategist at TD Waterhouse, has said a bear market is unlikely in 2008 because the subprime crisis is already "embedded in current market prices." He is calling for single-digit returns for both Canadian and American equity markets this year.

Chapman – while bullish on gold and other precious metals along with some energy stocks and agricultural issues – believes the broader market will continue to weaken through the first part of 2008.

He says folks such as him, people who candidly call for market tops and bottoms, are a relatively small minority. "We're looked on as charlatans," he said. "In markets, everybody wants to feel good."

That's because those on the Street have a "vested interest" in pushing the market higher and keeping their clients in it. Consequently, many choose to be "more nuanced" in their commentaries, he said.

"Because that is what they are in business for. They don't make any money with people sitting with their funds parked in cash," Chapman added. ". . . They would never come out and say there is going to be an outright bear market in 2008."

Stock-market bears are the unloved outliers of the financial game. Bears are often dismissed or derided by the many more bullish market players as curmudgeonly naysayers who blindly fixate on the bad side of every economic statistic or corporate earnings report while losing sight of general economic prosperity.

Bill Carrigan, an independent stock-market analyst and Toronto Star columnist, says most people take Chapman's predictions tongue-in-cheek. "Gold bugs perpetually like gold and they are always forecasting the end of the financial system and the free world as we know it . . . which is what he always does," he said. "So he's been a bear in the market for as long as I've known him, about 15 years."

When asked about Chapman's worst call in that time, Carrigan said: "He's been wrong on the market for 15 years. The market has gone up for 15 years. Gold has done nothing for 15 years. Gold just recently hit the high that it hit back in 1980."

Chapman, of course, isn't the only vocal pessimist these days. Merrill Lynch economist David Rosenberg has frequently warned of a deteriorating outlook for the economy and corporate profits, the result of soaring energy costs, tumbling real-estate values and tightening credit.

Seattle hedge-fund manager Bill Fleckenstein, pointing to the credit crisis and the rising risk of recession, has long been warning of a stock-market wipeout on his website and in his MSN.com column.

Robert Prechter is another well-known stock market analyst who wrote the 2004 bestseller Conquer the Crash. In 1987, he predicted the Dow Jones industrial average would peak at 3,600 in 1988.

Websites dedicated to bear forecasts, such as prudentbear.com, provide a drumbeat of dour predictions about a financial system run amok and bound to implode.

A report by Russell Investments earlier this week suggested that bears "now dominate opinion for the first time in several quarters," noting that bullishness toward Canadian broad market equities has dropped from 42 per cent of investment managers to just 28 per cent.

Nonetheless, 77 per cent of those surveyed still expect Canadian equities to post "flat to positive returns" in 2008, the report said. Those same managers, however, remain uneasy with respect to the credit crunch.

"It seems that many managers are cautiously waiting to see how the subprime credit crunch and rumours of a U.S. recession will unfold, while at the same time betting that the Canadian market will be in a position to move ahead over the next 12 months," Timothy Hicks, chief investment officer of Russell Investments Canada, said at the time of the report's release.

He added: "The shift to a more bearish stance on equities comes amid not only the credit crunch, but also a string of negative indicators. This includes evidence of a slowing global economy, downward earnings growth revisions in both Canada and the U.S., and a diminished corporate profit picture.

"Despite aggressive measures by central banks to cut key lending rates and inject liquidity into the market, investment managers appear to be approaching the market with caution."

Chapman, however, has been bearish for years. When he predicted that Nortel's stock would fall to $10 at the height of the tech boom in 2000, some people laughed. Others were outraged.

His analysis at the time, when Nortel's stock was trading well above $100, was that it had formed a classic pattern called a "parabolic runaway." Typically, such movements involve a stock's price soaring to a great peak before collapsing, over time, to where it started. At the time of his Nortel commentary, he advised that money would be better spent on energy, metals and precious metals stocks. Just over two years later, Nortel's stock fell to 69 cents.

"I jokingly issued an apology," Chapman said. "Sorry, I got it wrong. It was worse than I thought."