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​November 17, 2017

Big Oil Under Pressure

A shot fired from Norway was heard across the world this week. Where does this leave Canada?

So What Happened?

On Thursday, Norway’s US$1 trillion sovereign wealth fund announced that it will divest its entire stake of petroleum stocks worth US$35 billion over an undisclosed timeline. The idea behind the sale is to make the Norwegian economy less vulnerable to a drop in crude prices. If the sale is approved by Norway’s Finance Ministry, it could bring millions of shares to the market and test the appetite of other investors for companies that are striving to show they’ve seen off the worst of crude oil’s slump.

The next question that arises is what are they seeing which other investors aren’t? Is there a reason to be cautious over oil and gas relative to broader markets over the coming year or two?

Oil prices have increased as OPEC production cuts help to shrink global inventories and demand strengthened. Major oil companies have also started to demonstrate they can live with prices at $50 to $60 a barrel by cutting spending. However the age old debate between fossil fuels and renewables arose again. The industry’s future is being questioned like never before as electric vehicles and the fight against climate change prompt some forecasters to predict that within a decade demand could peak for gasoline and diesel --the backbone of the industry in the past century. Experts feel that Norway has taken action to protect its sovereign wealth fund assets from the consequences of the coming peak in oil demand.

My Two Cents

So where does this leave the Canadian economy? While the equity markets will be jittery in 2018 as the divestment process begins, I don’t see it affect oil prices and in turn the Canadian economy in the near term. The price of oil is a fundamental function of supply and demand which will be controlled by production volumes between OPEC and non-OPEC members.

Two interesting points arise from this announcement which can affect Canadian CRE going forward. 1) Canadian oil producers also have to show that the can survive and profit at $50-$60 levels. As they do, so they’ll grow thereby leading to a return in jobs and business investment. Both things being a positive for CRE especially in Alberta. 2) Should other pension funds and long term investors follow suit, which some are expected to, there will be a rise in capital available for investment. While I expect most of it to be allocated to other equities, institutions may increase allocations to other asset classes including commercial real estate, keeping the risk –reward structure in mind. A rise in available capital can be beneficial for the global CRE sector, including Canada.

On the Market

Exxon and Shell top the value of Norway's sovereign wealth fund's oil holdings

Note: Includes oil companies with at least $50 billion market capitalization
Source: Norges bank Investment Management - Bloomberg