Why oil investors should hit the pause button

Oil prices have surged but the strong performance of the US dollar should make investors hit the pause button, according to a Toronto portfolio manager.

Norman Levine, managing director of Portfolio Management Corporation, told WP that the advances made by the green back and the weakening of other currencies – including the Canadian dollar – should signal caution for commodity prices going forward.

Domestic political issues and lack of pipelines have caused investors to hold back, while global issues in the energy market around Venezuela, Libya and Iran also add uncertainty to the market.

Levine’s company owns three energy stocks – two Canadian and one international – and said that, in general, some money has clearly been made given the increase in the oil price. However, he warned that everything is "not beautiful enough" to encourage investors to throw more money into the sector.

He said: “With the US dollar breaking out to new highs, we think it’s time to pause putting new money in and see what happens to the price of oil. Even though the correlation to oil and energy stocks isn’t as high as people think it is, there is a lot of correlation there, so it should give investors reason to pause, just to wait and see what happens with the price of oil vis-à-vis the US dollar breaking out.”

Levine aligns his portfolio closer to international weighting, which is about half of what Canadian weightings are. The most recent addition to his energy portfolio is Cenovus, which he said has been doing a great recovery job after previous failings.

He added: “We wanted to add to our weighting because oil is going up and we were underweight the area. We thought if the price of oil is going up, we want to be close to the market weight in energy but the Canadian ones were way cheaper and Cenovus has been doing a good job of fixing humungous problems the previous management got the company into.

“So we could get a double whammy; it will benefit from the price of oil going up plus it’s benefiting from the company turning itself around and improving its balance sheet.”

Its exposure to the refining business was also an attraction but Levine stressed that oil stocks are not ones to hold for ever. His message to investors is to focus on the higher quality, larger companies, stay focused on oil (for now), keep an eye on the US dollar and don’t forget to sell because you only make money in this sector by trading.

Of course, in the foreground of every debate around the Canadian oil price and industry is the issue of pipelines – or lack of them. For Levine, the problem adds to the uncertainty for investors and makes it tough for any producer to bring their product to market. Prices rise but volume is cut, meaning the industry is essentially stagnating.

Levine said: “It has highlighted the value of oil by rail but that’s only because the alternative doesn’t exist – the new pipelines. It only works when the price of Canadian oil sells at a big enough discount to US oil prices to make that extra amount you send by rail profitable. If the discount gets too tight, and it did for a while there, it doesn’t make that extra expense for rail viable.”

Levine also said the environmental groups that oppose the new pipelines “make no sense” to him and that he can’t understand why shipping by rail, which is inherently accident prone, doesn’t elicit a comment from them but pipelines, which are the safest way to transport petroleum and its products, are not socially acceptable.

However, he thinks the general Canadian public are starting to make their position clear.

He said: “I believe that the average Canadian electorate is catching on here and you are seeing that in the provincial election results across the country.”