The oil price crash continues to claim victims…and many of them are in Canada.

The price of oil hovered around $100 for most of last summer. Today, it’s trading for less than $45.

Weak oil prices have pummeled huge oil companies. The SPDR S&P Oil & Gas Exploration & Production ETF (XOP), which tracks the performance of major U.S. oil producers, has declined 36% over the past year. The Market Vectors Oil Services ETF (OIH), which tracks U.S. oil services companies, has declined 30% since last November.

Weak oil prices have even pushed entire countries to the brink. Saudi Arabia, which produces more oil than any country in the world, is on track to post its first budget deficit since 2009 this year. If oil prices stay low, the country could burn through its massive $650 million pile of foreign reserves within five years.

• Oil’s collapse is also creating big problems for Canada’s economy…

 Canada is the world’s sixth largest oil producer. Oil makes up 25% of its exports.

Last month, The Conference Board of Canada said it expects sales for Canada’s energy sector to fall 22% this year. It also expects the industry to record a net loss of about C$2.1 billion ($1.6 billion) in 2015. That’s a drastic change from last year, when the industry booked a C$6 billion ($4.5 billion) profit.

Major oil firms are slashing spending to cope with low prices. Last month, oil giant Royal Dutch Shell plc (RDS.A) said it would stop construction on an 80,000 barrels per day (bpd) project in western Canada. The company had already abandoned another 200,000 bpd project in northern Canada earlier this year.

The Canadian Association of Petroleum Producers estimates that Canadian oil and gas companies have laid off 36,000 workers since last summer. Most of these layoffs happened in the province of Alberta…

• For the past decade, Alberta was Canada’s fastest growing province…

Its economy exploded, thanks to the booming market for Canadian tar sands.

Tar sand is a gooey sand and oil mixture that melts down with heat from burning natural gas. More than half of Canada’s oil production comes from tar sands. In Alberta, they account for 75% of oil production.

Tar sand is generally more expensive to produce than conventional crude oil. Canadian tar sand projects made sense when oil hovered around $100. But many of these projects can’t make money when oil trades for $45/barrel. Last year, Scotiabank (BNS) said the average breakeven point for new Canadian oil sand projects was around $65/barrel.

This is why giant oil companies are walking away from projects they’ve spent years and billions of dollars developing.

• All these cancelled oil projects are making Alberta’s economy unravel…

Alberta lost 63,500 jobs from the start of year through August. It hasn’t lost that many jobs during the first eight months of the year since the Great Recession.

The decline in oil production is also draining government resources. Last month, Reuters reported that Alberta was on track to post a $4.6 billion budget deficit this year. Economists say it could be another five years before Alberta runs a budget surplus.

The crisis isn’t confined to the oil patches either…

• A real estate crisis is unfolding in Calgary…

Calgary is home to 1.2 million people. It’s the largest city in Alberta and the third largest in Canada.

On Tuesday, Bloomberg Business reported that Calgary’s property market is starting to crack:

Vacancy is already at a five-year high in Calgary and rents are the lowest since 2006 after thousands of office jobs were cut.

In downtown Calgary, the vacancy rate jumped to 14 percent in the third quarter, the highest since 2010 and compared with 5 percent for downtown Toronto, according to CBRE Group Inc. …. That doesn’t include as much as 2 million square feet of so-called “shadow vacancy” or space leased but sitting empty, which would push vacancy to 16 percent, the most since the mid-1980s.

Demand for office space is falling because of massive layoffs in the oil industry. That’s because oil companies didn’t just lay off roughnecks. They also laid off oil traders and middle managers, which means they need a lot less office space.

According to Bloomberg Business, a principal at one Calgary real estate office called the situation “a bloodbath” and said “we’re at the highest point of fear and uncertainty now.”

• Time to buy is when there’s blood in the streets…

But it looks like Calgary’s property crisis is just getting started.

Bloomberg Business reports that the city has five new office towers in the works. These projects will add about 3.8 million square feet to Calgary’s office market over the next three years. More office space will only put more pressure on rents and occupancy rates.

Real estate developers likely planned these projects because they thought Canada’s oil boom would last. It’s that same thinking that made oil companies invest billions of dollars in projects that can’t make money when oil trades for less than $100/barrel.

• Doug Casey saw this coming…

In September, Doug went to Alberta to assess the damage first-hand. E.B. Tucker, editor of The Casey Report, joined Doug on the trip.

Doug and E.B. spoke with the locals. They even tried to buy a Ferrari. They shared their experience in the October issue of The Casey Report…

E.B. went on record saying Canada was in for “a major wakeup call.” He still thinks that’s the case. In fact, he thinks the situation is going to get a lot worse.

When we were in Alberta, we heard over and over again “It’ll come right back…it always does.” It’s not coming back.

I expect the situation to get worse. And I see the Canadian dollar going much lower.

When that happens, E.B. thinks Canada’s central bank might do something it’s never done before:

Vacancy rates are rising in Canada’s heartland cities. Jobs in Alberta are disappearing. Unemployment is climbing. And there’s still a global oversupply in oil. None of this bodes well for Canada’s economy.

Canada’s economy is in a midair stall. The locals certainly didn’t grasp this when we visited Alberta last month. That’s usually the case when things are going from bad to a lot worse.

If you’re a central banker in Canada looking at the data, there’s only one decision: print…

• E.B. says Canada’s central bank will launch its own quantitative easing (QE) program…

QE is when a central bank creates money and pumps it into the financial system. It’s basically another term for money printing.

Since 2008, the Fed has used QE to inject $3.5 trillion into the U.S. financial system. If the Fed’s experience with QE is any indication, money printing wouldn’t help Canada’s “real” economy much. But it would inflate asset prices. That, in turn, would only make Canada’s economy even more fragile.

E.B. is confident the situation in Canada will get worse. And he can’t wait to go back to Canada to collect on bets he made during his last visit:

Doug and I made a lot of side bets with business owners during our visit. One of them promised to sell us a Ferrari if things got worse…that’s how sure he was that we were wrong. Looks like we’ll be headed back to collect on that one…

You can read all about Doug and E.B.’s visit to Alberta by signing up for a risk-free trial of The Casey Report.You’ll even discover how to make money off the oil industry, despite the collapse in the price of oil. Click here to learn more.

Attached is our Maison Energy Monthly for November 2015.  We remain in the bear camp but expect the final shake-out to occur over the next 5-8 weeks and for oil to bottom in the low US$30’s/b. A Table Pounding buying opportunity should occur at that time.  Investment Ideas for the bottom and purchase prices are included in the issue.

There is a sneaky industry bubbling up around oil.

The foundations of this industry were built back in the 1800s and are one reason America is the country it is today.

She’s got a lot of assets — and heck, the robber barons couldn’t keep their hands off.

If you haven’t guessed by now, I am talking about railroads.

Over the past 6 months, railroad companies have experienced a lot of downward pressure due to dropping production from the U.S. oil patch.

However, with talks of a Norfolk takeover and veto of the Keystone XL pipeline, this old time industry is putting the pedal to the metal and stocks are shooting north.

Below, Greg Guenther gives his take on the US rail industry and which company offers a way to make a pretty penny before the year is up. 

2 Transportation Catalysts that Could Hand You Double-digit Gains

In a sea of red, one group of stocks is flashing green again.

And now takeover rumors in this sector are attracting a lot of investor attention. If you act now, you could quickly nab double-digit gains—no matter how the market acts over the next couple of weeks…

What stocks am I talking about? Railroads.

While the major averages drooped more than 1% three days ago, the U.S. Railroad Index chugged nearly 3% higher.

The catalyst? Rumors that Canadian Pacific Railway is in the early stages of taking over Norfolk Southern Corp. And let me tell you something—these railroad stocks desperately needed it. Investors have squashed the major railroad stocks to a pulp this year. Before the takeover rumors started flying, Norfolk Southern stock was down nearly 25% year-to-date.

The oil crash has been a double-edged sword for transportation stocks. While fuel costs are down, decreased activity in America’s shale basins means trains are shipping less crude across the country. But thanks to Monday’s pop and recent news, we could be seeing the beginnings of some tradeable bottoms in the rails…

Norfolk Southern Corp. rallied double digits to close out the trading day. CSX Corp even spiked 3% in sympathy of the takeover news.

But aside from takeover chatter, even the news cycle is turning back in favor of the ailing rail stocks. You probably heard that the Obama administration finally deep-sixed the Keystone XL Pipeline after seven years of nonsensical review. But hey, screw pipelines! We toss our crude onto trains that may or may not occasionally derail in a fiery disaster.

Either way, the focus is back on the trains. Before all this nonsense was set in motion over the weekend, Forbes reminds us that the “big 4” U.S. railroad stocks– CSX, Kansas City Southern, Union Pacific, and Norfolk Southern – were all down at least 25% on the year.

“But there’s a reason Warren Buffett and Berkshire Hathaway bought Burlington Northern a few years back. Railroads are durable businesses,” Paul Karos, senior portfolio manager at Minneapolis’ $4 billion Whitebox Advisors, told Forbes. “Barriers to entry are high, margins are expanding and the group should benefit if the U.S. stays out of recession.”

During the first half of the year, transportation stocks couldn’t catch a bid. While the Dow Jones Industrial Average chopped along near breakeven, its cousins over at the Dow Jones Transportation Average piled up double-digit losses by early July. Now’s your chance to play a snapback rally in the transports as all of this train news comes to a head…

Check out CSX Corp. (NYSE:CSX). After trending lower for months, CSX is beginning to attract strong buying on almost every dip:

Monday’s 3% move higher on strong volume should help snap this stock out of its malaise. And it offers you the perfect chance to hop on and ride the rails to double-digit gains before the year is up.

So be sure to hop on this gravy train today.

Sincerely,

Greg Guenthner

While OPEC continues to talk tough about oil production, the International Energy Agency (IEA) is warning that its strategy may backfire on them. This comes the day after the United Arab Emirates (UAE) Energy Minister Suhail Mohamed al-Mazrouei is saying the UAE plans to double down in the OPEC price war by raising production in the next few years to 3.5 million barrels a day, up from 2.9 million barrels per day. He is predicting that the drop in oil prices is almost over and soon prices will start to rise.

The IEA on the hand is not so sure, saying that the OPEC strategy to keep market share may hurt other OPEC members and keep oil prices low for a sustained period. The IEA says that oil is unlikely to return to $80 a barrel before the end of the next decade, despite unprecedented declines in investment, as yearly demand growth struggles to top 1.0 million barrels per day. While OPEC may gain market share in the long run, they will have to deal with the pain of low oil prices in the short run. The IEA is predicting that demand growth under its central scenario will rise annually by some 900,000 barrels per day to 2020, gradually reaching demand of 103.5 million bpd by 2040. Of that OPEC’s market share will remain at 41% until 2020 then rise to 44% by 2025, which is just two percentage points higher than the IEA forecast a year ago.

The International Energy Agency also predicts an end to production growth from outside of OPEC saying it will halt over the next five years. The IEA says that U.S. shale output will peak in 2020. They said that U.S. production with, “its ability to respond quickly to price signals is changing the way the oil market operates.” But its rise will be constrained because of the nature of pumping from shale formations, short-term projects in which oil wells are depleted quickly.

The IEA’s gloomy outlook is being lost on some OPEC members who believe a price turnaround is just around the corner. In fact, OPEC is not even worrying about the return of Iranian oil. OPEC Secretary General Abdalla El-Badri is saying that OPEC can do anything to accommodate new Iranian oil output.

Bloomberg News reports that global demand for crude will bring more balance to the oil market as soon as next year, according to Pulitzer Prize-winning author and energy consultant Daniel Yergin and OPEC Secretary General Abdalla El-Badri. The oil market will rebalance in 2016 or 2017, as demand grows between 1.2 million barrels per day and 1.5 million barrel per day through 2020, Yergin, vice chairman of consultants IHS, said in a speech in Abu Dhabi.

Demand will rise by about 17 million barrels a day to almost 110 million barrels a day by 2040, with 70% of the growth to come from Asia, the head of the Organization of Petroleum Exporting Countries said at an event in Doha. Yergin added: “The next few quarters are going to continue to be tough as Iranian oil comes back into the market. We really see 2016 as the year of transition.”

I agree more with Yergin than the IEA’s more gloomy outlook! Long term it is time to buy when there is blood in the streets!

About the Author

Senior energy analyst at The PRICE Futures Group and a Fox Business Network contributor. He is one of the world’s leading market analysts, providing individual investors, professional traders, and institutions with up-to-the-minute investment and risk management insight into global petroleum, gasoline, and energy markets. His precise and timely forecasts have come to be in great demand by industry and media worldwide and his impressive career goes back almost three decades, gaining attention with his market calls and energetic personality as writer of The Energy Report. You can contact Phil by phone at (888) 264-5665 or by email at pflynn@pricegroup.com. Learn even more on our website at www.pricegroup.com.

 

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