Oil enjoyed one of its best one-day gains in a decade on Monday. Brent futures ended the day up 15% over the previous day’s close.
Unfortunately, it came as a result of a terrorist attack in which half of Saudi Arabia’s oil production was taken off line. This is equal to approximately 5% of the global supply. Terrorism is never an event to take lightly and this weekend’s attack is a reminder that we live in uncertain times.
Following the attacks, the U.S. was quick to place blame on Iran, dismissing the claims made by Houthi rebels in Yemen. Saudi Arabia followed suit on Monday, acknowledging that the attacks did not come from Yemen.
There are many questions still to be answered, and until then expect the markets to remain skittish. The economy was already on fragile ground and any type of large-scale military response will have global repercussions.
Will prices continue to rise?
It is important to note that typically, spikes as a result of on-time events are usually temporary. In fact, the price of crude is already pulling back in pre-market trading. A rise in prices based on fundamentals is preferred, as they tend to last longer – if not indefinitely.
As the price of crude rose, Canada’s oil and gas industry was a side beneficiary. The TSX Index hit new all-time highs on Monday after the S&P/TSX Capped Energy Index jumped 9.25%.
Some of the largest Canadian stocks on the Index saw their biggest one-day gains of the year. Suncor (TSX:SU), Canadian Natural Resources (TSX:CNQ) and Encana (TSX:ECA) jumped by 6.5%, 12.8% and 16.2% respectively.
Will the rally be short lived?
If the price of oil pulls back in any significant way, then you can expect oil and gas companies to follow suit. However, it is possible that energy stocks will maintain their gains despite a pullback in commodity prices.
Why? The industry was ridiculously undervalued. Many industry players were trading near decade lows. This is despite the fact that the price of oil was almost double the low it touched during the most recent oil bear market. Between 2015 and 2017, the price of oil dropped to a low of $29 per barrel. It spent the better part of those years below $40 per barrel.
In the past year, valuations decoupled from the price of commodities and as a result, many of the industry’s biggest names were trading at prices not seen in decades. The drop to valuations at, or below where they were trading in 2015-17 was unjustified. At prices above $50 a barrel, many are still highly profitable and generate a considerable amount of cash flow.
There will be plenty to digest over the next few days and weeks, in the meantime stick to companies with strong fundamentals such as the three mentioned above.