Tar-sands stocks will sink if oil price slides
Jun 27, 2008 04:30 AM
Bill Carrigan
Proponents prefer the cleaner "oil-sands" tag and opponents prefer the dirtier "tar-sands" tag. Of course, investors older than 50 tend to use the original term, tar sands.
Lately it's difficult not to notice the growing controversy over the runaway development of Canada's tar sands and its contribution to global warming. Migratory bird deaths at a Syncrude tailings pond in April delivered another public-relations blow to tar-sands companies.
Proponents of oil-sands development, such as the Canadian Association of Petroleum Producers, claim to be making investments in new technologies to cut water consumption and reduce the size of the toxic tailings ponds.
Opponents, such as Greenpeace, other environmental groups and many U.S. politicians, call the tar sands "the world's dirtiest source of crude oil." Last weekend in Miami, the U.S. Conference of Mayors adopted a climate-change resolution urging cities to discourage the use of fuels from "high-carbon" sources such as the tar sands.
Another salvo came from Barack Obama, the Democratic U.S. presidential candidate, who has endorsed a proposed, national ``low-carbon fuel standard,'' which could penalize gasoline marketers in the United States that rely on oil-sands production.
Investors are always confronted with compelling stories and their associated dilemmas that can sometimes cause poor investment decisions. Usually the best strategy is to tune out the stories and listen to the markets to determine if the shares of these companies have a place in your portfolio.
If you're a green, socially responsible investor, the answer is probably not, but as a technical analyst, I am compelled to turn to the markets for the answer.
Examine the long-term price structure of the energy complex. Ground zero for the current upward trend would be in early 1998 when the price of crude and the related energy stocks bottomed with little interest from investors who were chasing technology stocks.
The first bull cycle in the energy complex ran from 1999 to mid-2002 with the price of crude advancing about 125 per cent. Over the same period the price of Suncor Energy Inc., one of the biggest oil-sands players, ran from $5 to $14, a gain of about 180 per cent.
This was a classic first up-leg advance and true to past history, went largely unnoticed by investors preoccupied with terrorism and white-collar crime.
The energy complex then traced out a short flat bear through 2002 and 2003 that provided a base for the next or second great advance through 2004 to 2006. In this period the price of crude gained 135 per cent and the price of Suncor gained a stunning 290 per cent, grabbing the attention of investors fearful of missing out on the "next big thing."
The year 2006 was another flat one for the sector and, in early 2007, the price of crude began the current eye-popping advance from $70 (U.S.) to the current $135-plus for a gain of about 100 per cent. Once again, the price of Suncor followed, running from $44 (Canadian) to the current $61 for a gain of about 43 per cent
Can you see the problem? This is the only advance in which Suncor's price has failed to keep pace with crude's price gains. We call this relative weakness.
Our chart this week plots the monthly closes of crude oil against Suncor's monthly closes.
Note the price move in crude as it pushed above the $80 level and note the somewhat pale price move in Suncor as it pushed above the $50 level. Suncor's price relative to crude is quite bearish.
That tells me that if the price of crude began to slide the price of Suncor would react badly. This could be also bad for the TSX composite index, which is dominated by a handful of tar-sands related stocks.
This problem suggests the "next big thing" could, as usual, end badly.
Bill Carrigan is an independent stock-market analyst. He can be reached at www.gettingtechnical.com
