In our featured economic commentary this week, we discuss how the ingredients for a more accommodating oil price environment may be falling into place, which should come as a welcome relief to the energy sector. We have also included the most recent #MacroMemo video from Eric Lascelles, Chief Economist with RBC Global Asset Management, where he shares the latest COVID-19 updates and refreshed economic data.
This week’s blog also includes a few other interesting articles and resources:
- Special Report: What’s happening with Bitcoin?
- *Video* Your cognitive health: Symptoms, safeguards, and support
- Breaking down economic data: What's in store for the U.S. economy?
- Black Tie Bingo
Don’t forget to RSVP for the upcoming event, Mental health and resiliency in a time of change, featuring RBC Olympian Tyler McGregor, on February 17 at 1 p.m. Event details and your RSVP link are below.
As always, we end our weekly blog post with a few good news stories from in and around our community.
Happy Family Day!
Please note that our office is closed on Family Day, Monday, February 15. We will be back answering your calls and emails on Tuesday, February 16.
Your economic update
Increasing confidence that the pandemic is under control and that a very robust economic and earnings recovery will soon be upon us has been the narrative in the global equity markets over the past few weeks. One of the best performing sectors so far this year has been global energy. Despite some long-term headwinds that remain very much in place, the supply and demand dynamics that are typically responsible for the price of oil are beginning to look more constructive than they have in years. We explain a bit more below.
North America continues to see a meaningful decline in infection trends. In Canada, the seven-day average rate of new daily infections fell, but the magnitude was noticeably less than the last few weeks. The figure now stands at close to 3,500 new daily cases versus the 4,000 from a week ago. Many provinces are experiencing declines, but Newfoundland is grappling with its largest outbreak since the pandemic began, while Nunavut has also seen an increase. In the U.S., the seven-day average rate of new daily cases fell to close to 95,000 versus the 120,000 from the prior week.
The decrease across the globe over the past few weeks has been encouraging, but a third wave (or fourth in the case of the U.S.) remains a distinct possibility. The Spanish Flu of 1918-1919, which has often been used as a comparison, followed such a pattern, though fortunately its third wave was not as severe. It is hard to predict the path of this virus, but investors will undoubtedly be on guard. Fortunately, the pace of global vaccinations is expected to accelerate in the weeks and months ahead.
Energy – some relief, for now
The global energy industry has faced some difficult times. The headwinds began nearly a decade ago with the rise of U.S. shale production that led to a significant increase in supply. More recently, the growing investor focus on sustainability with a particular emphasis on climate change and the environment has created another powerful headwind. Then last year, the arrival of the pandemic resulted in an immediate and dramatic decrease in demand for oil as governments were quick to shutter parts of their economy. As if that wasn’t bad enough, Saudi Arabia and Russia, two of the world’s largest producers of oil, entered into a spat over production and market share. Ultimately, the combination of these latter developments resulted in oil prices going negative for the first time on record for a brief period nearly a year ago. An additional challenge for Canada has been the lack of pipeline capacity that has resulted in a long lasting discount in the price of a Canadian barrel of oil.
As with many things, time has a tendency of healing some wounds. Oil prices have bounced back and the global energy sector has led equity markets higher year-to-date. The anticipated recovery from the COVID-19 pandemic has much to do with it, as investors expect a vigorous rebound in oil demand driven by the reopening of the global economy through the second half of the year. More importantly, there are supply considerations that could lead to a constructive outlook beyond this year.
There has been significant underinvestment on the part of energy producers around the world in recent years. Most have scaled back their capital expenditures, particularly around new projects in the wake of the weak oil price environment. It could lead to a situation where demand outstrips supply over the next few years. Rising demand combined with limited supply could provide more supportive conditions for energy prices.
Some capital will inevitably return under a more favourable pricing environment, but there are a number of reasons to believe that the elasticity of supply will not be what it once was. For instance, the U.S. shale industry has undergone a period of consolidation, and many are now seemingly prioritizing free cash flow, balance sheet health, and capital discipline with a focus on returning capital back to shareholders over producing higher levels of oil. Moreover, access to funding may be more challenging and costly in a political backdrop where carbon emissions are a priority for the U.S. administration. Furthermore, climate change, the environment, and broader sustainability continue to be key issues for lenders and investors alike, suggesting that capital may not be as widely accessible for oil producers at the global level relative to the past.
The wildcard may be OPEC, as has often been the case. The international consortium of 13 oil producing nations, led by Saudi Arabia, has significant influence over the oil market as its decision to raise or lower production often drives the near-term direction of prices. Also, it has sometimes been unpredictable in its behaviour. Over the past year, OPEC has shown a willingness to sacrifice its own production and accommodate other countries for the sake of price stability. While this has proven to be supportive for the oil markets, it is hard to predict if this will remain its approach going forward.
It appears that the ingredients for a more constructive outlook for oil over the intermediate term may be falling into place. That will come as a welcome relief to the energy sector, yet some meaningful longer-term challenges remain. The world is trying harder than ever before to transition away from fossil fuels and into more renewable sources of energy – It’s hard to imagine that trend abating. Moreover, oil has many uses beyond being a primary fuel source. Electric vehicles for example depend on oil in the form of the plastic content used to ensure the vehicles are as light as possible. While there is no denying the secular headwinds that exist, the outlook is more nuanced than it may appear.
Further COVID improvements
With ongoing vaccine progress and declining hospitalization numbers, governments are exploring a limited reopening strategy – but certain risks persist. In this video, Eric Lascelles visits the latest COVID developments and shares refreshed economic data for late 2020 and early 2021.
Watch the video or read the transcript online: Further COVID improvements
Bitcoin is a potentially transformative technology whose impacts may extend beyond its use as an investment. For its most ardent advocates, a belief that Bitcoin will change society is close to an article of faith. Conversely, there are many decided nonbelievers who view the current enthusiasm for Bitcoin as a speculative phenomenon. The financial world is starkly divided on this issue.
Please note that RBC Wealth Management does not currently provide any recommendations or solutions related to Bitcoin or other cryptocurrency assets. This special report is our effort to summarize and clarify the many questions about what Bitcoin is and how it may be relevant to investors today, and is for information purposes only. In our view, any investment in Bitcoin should be considered speculative, meaning that investors should be prepared to lose all of their investment.
Read the special report on our website: Special Report: What's happening with Bitcoin?
Your cognitive health: Symptoms, safeguards, and support
Breaking down economic data: What's in store for the U.S. economy?
After last week’s solid GDP report, data this week quelled near-term concerns that activity may be heading for a slowdown to start the first quarter, with Purchasing Managers’ Indexes, jobless claims, construction spending, and durable goods orders all trending in the right direction.While debate goes on in Washington over the ultimate size and structure of a third fiscal aid package, there is more likelihood it will come in at a number well north of the $750 billion–$1 trillion markets and analysts have generally been expecting.
You can read the full article on our website: What's in store for the U.S. economy?
Mental health and resiliency in a time of change
Black Tie Bingo
We’re proud to support the 25th annual Black Tie Bingo in support of Guelph General Hospital as the Bingo Sponsor at the ‘Black Tie Bingo - In A Box’ virtual fundraising gala!
It’s an online event to enjoy from the comfort and safety of your home, live streaming with live MC Sean Furfaro. You can choose to have a 4-course dinner and wine delivered to your door within Guelph, online live and silent auctions exclusive to ticket holders, and a fun game of BINGO to top off the evening. Dress up or casual or comfy, it’s up to you!
For information and to buy tickets, visit www.BlackTieBingo.com. Ticket sales close on Wednesday, February 17th.
Each week, we like to end our blogs with a few good news stories from in and around the community. We hope that they brighten your day!
- Black history of Wellington County featured at museum
- Attention selfie lovers: city installs new Guelph sign in Market Square (3 photos)
- Preschoolers show support for the arts with artwork of their own
- Georgetown Lions provide random acts of kindness at Georgetown Hospital
- '100 Doodles of Guelph' initiative captures landmarks and small businesses in community