by Michael Wuetherick, P.Eng.
User Group Leader, Red Deer, AB
Nov 18, 2014

What drivers could be behind the recent crude oil price decline, and how will this impact Canadian energy companies? Using the US Oil Fund EFT as a proxy, VectorVest users can chart the movement of crude prices in North America. From its recent peak on June 20, crude prices have fallen roughly 30% over the past 4-5 months.

USO Oil Fund ETF

The relative strength of the US dollar also impacts crude prices, primarily as demand in emerging and energy consuming economies (i.e. Japan, Europe) shrinks as their buying power in US dollars subsides. Did supply suddenly spike, or demand dramatically change overnight? The energy industry moves fast, but not that fast! No. The price breakdown accelerated with the rise of the US Dollar index which began a strong uptrend in July 2014.

Crude Oil Performance Graph

Crude oil prices are influenced by more than fundamentals and currency swings. Geo-politics, OPEC policy, technology advances (i.e. shale oil development), weekly storage inventories and pipelines like Keystone XL all have impacts on the day-to-day trading volatility…which is typically “noise” in the daily tape!

Since putting in a low on October 11th, energy equities on a relative basis are starting to diverge away from the steadily decreasing crude prices. Is this perhaps a sign of a bottom to the short-term commodity based sellers? With crude at 5-year lows are we perhaps poised for a rebound? The last time crude was this low it rebounded over 65% in four months!

USO XLE Performance

Investor’s almost always over-react to short-term price declines, over-selling equities when crude falls and over paying when crude spikes. Sound familiar? CEO’s of the most successful energy companies typically will hedge their future cash-flows to ensure a stable stream of capital available for re-investment. Companies that excel at managing the financial AND technical aspects of this intensely complex industry will deliver superior results as measured by share price performance!

So how can you find companies that are mostly likely to withstand the current price pullback, if not continue to thrive? Simply use VectorVest’s Unisearch tool to find companies that demonstrate the largest increase in sales per share and net profit margin. Not only will these companies be growing production, but increasing net profit margin also implies more stable revenue streams. If these companies can rapidly grow SPS and NPM despite a 30% drop in crude, are they likely to perform well when prices eventually rebound? Only time will tell!

Energy Stocks SPS and NPS Search

YOUR COMMENTS PLEASE: Are you buying petroleum stocks yet? What stocks are in your WatchList?