August 27, 2013
Shipping Canadian oil to India through the Suez Canal? Really?
Equity prices in the U.S. had another outstanding month in July. Canada’s share values were less bubbly. I’ll have more to say on that subject later in this article.
Both the Dow Jones Industrials (DJI) index (15,634) and the S&P 500 (1,699) recorded new all-time highs. The NASDAQ index (3,649 for its 52-week high) also pulled ahead dramatically, +6.6% month-to-month, but it’s burdened with a dot-com boom level (4,696 in early 2000) that still remains elusive.
At July’s close of trading, NASDAQ was the leader year-over-year (+23.4%) compared with both the S&P 500 (+22.3%) and the DJI (+19.1%). The Toronto Stock Exchange (TSX) was a modest +7.0%.
All four indices recorded their recessionary trough levels in February, 2009. Since then, NASDAQ is +163%; the S&P 500, +129%; the DJI, +120%; and the TSX, +54%.
The day after July’s closing, on August 1, there were two other positive readings on the U.S. economy.
Initial jobless claims for the week of July 27th were only 326,000, the lowest figure yet since the recession, although the end of April and beginning of May this year were almost as restrained, 327,000 and 328,000 respectively.
Other than those three weeks, one has to look way back to mid-January 2008 to find a better number (318,000).
Initial jobless claims maxed out at 670,000 (i.e., more than double) at the end of March, 2009, when the recession was taking its greatest toll on the economy.
A figure for first-time unemployment insurance seekers between 300,000 and 330,000 on a consistent basis will lead to monthly job gains of between 150,000 and 200,000 and it will speed up the decline in the unemployment rate, which has been hovering near 7.6%.
Also, the Purchasing Managers’ Index (PMI) of the Institute of Supply Management (ISM) shot up in the latest month to 55.4% from 50.9% in June.
When the PMI is above 50.0%, both the overall economy and the manufacturing sector are expanding. (Between 42.2% and 50.0%, national output will still be growing, but manufacturers will be experiencing weaker activity levels. Below 42.2%, nobody is “ahead of the game”.)
History has shown that a 55.4% reading for the PMI corresponds with a “real” (i.e., inflation-adjusted) gross domestic product (GDP) growth rate of 4.1% annually.
Returning to the TSX, the news emanating from the resource sector — which accounts for an outsized proportion of listed companies — has been rather gloomy of late.
A Russia-Belarus potash consortium has just splintered and some analysts expect the price of the popular pink fertilizer to drop by 25%.
China’s growth rate seems headed for 6.0% as opposed to a formerly lofty 10%-plus. The transition of the economy from export sales and infrastructure projects to domestic demand is reducing the need for raw materials from foreign sources.
One consequence has been overcapacity in steel production world-wide. Major iron ore project construction in northern and eastern Quebec has been delayed or cancelled. (Iron ore is a major input in steelmaking.)
The price of gold has dropped from over $1,900 U.S. per ounce to around $1,300 (a one-third decline), moving some precious metal investments to the back burner.
Extraction of chromite from the “Ring of Fire” region in northern Ontario isn’t moving forward as quickly as anticipated.
And the market for aluminum remains below potential, serving to keep the price under wraps.
It’s not as if major resource projects aren’t being delayed in other countries as well. Barrick Gold is being put through the ringer by environmental concerns related to its huge Pascua-Lama mining development on the border of Chile and Argentina.
Shareholders are holding board members to account as costs escalate and the possibility of a huge write-down looms.
But there is some encouraging news to report on the energy front. TransCanada Corporation has lined up backers (i.e., among major suppliers), for its Energy East pipeline proposal to carry crude from Alberta to refining facilities in Quebec City and the deep-water port of Saint John, N.B.
So take that, British Columbia, if you’re hesitant about oil being pumped across your northern territory to Kitimat for sale to customers in Southeast Asia.
And take that, President Barack Obama, if you can’t make up your mind whether or not the Keystone XL pipeline extension would be good for the energy security of the United States.
According to “people in the know” and as quoted in the media, the cost of shipping output from the Oilsands to the East Coast, while more expensive than it would be over the shorter distance to the West Coast, would still not be exorbitantly high, under $10 per barrel.
Saint John can accommodate the world’s largest seafaring oil tankers year round. They can service eager buyers among refineries along the U.S. Atlantic Seaboard and in Europe.
There is even talk of shipping Canadian oil to India, through the Suez Canal. On that subject, I have just one observation.
Such a plan would carry Canadian oil through the heart of the Arab World.
Imagine what oil ministers from Saudi Arabia, Iraq, Iran and some other nearby nations would think if they were to see large volumes of Canadian crude moving through their front yard.
It would certainly make for some interesting closed-door sessions among OPEC members.