So I’m spending time rewriting my Key Concepts tab on this blog and for a much-needed break I was reading the weekend edition of the Financial Times. Buried on page 12, front section I read this headline.
“Canada’s oil becomes cheapest in world amid glut in Alberta”. I will link this article in hopes you can read this very important article – not sure with paywalls and other restrictions – obviously from a Canadian perspective. For those that can’t link this article here is a short summary.
Western Canada Select, (WCS) the regional benchmark for low quality, viscous heavy oil, has fallen to less than $45 a barrel – less than half the cost of other crude oil benchmarks such as West Texas Intermediate.
So you have Brent crude, which I see quoted on television everywhere, is $109.04 as of Friday. Then you have West Taxes Intermediate (WTI) trading at $86.54, with WCS trading at less than $45!
The article quotes Charles St-Armaud, economist at Nomura, says Canadian oil producers are earning C$2.5bn less than they should every month. “This implies a revenue loss of about 1.6 percent of GDP”, for Canada.
The article continues, “The situation [lower prices for WCS, bigger discounts to Brent] is likely to get worse in the first half of 2013 before it improves”
I knew there was some sort of discount, but not this big!
So what do I do with this information? As I’m looking at model price charts, especially for oil sands companies, I will be on guard for possible future negative transits. Let me give you an example.
Looking at Canadian Oil Sands
Here is our model price chart as of Friday’s close.
Canadian Oil Sands with weekly price bars, EBV Lines (colored lines) and model price (dashed line)
Even before this article I was wondering rather COS holds EBV+3. After reading this article I am probably more suspect EBV+3 doesn’t hold. If you hold a position in COS, I would be on guard also. If COS does have a negative transit of EBV+3 lower stock prices will follow irrespective of the current juicy 7.19% yield Canadian Oil Sands is offering investors.