What the next U.S. president could mean for Canadian oil

The U.S. presidential election is only months away, and the outcome could impact how much—and how—Canadian crude flows into the U.S.

Regardless of whether the Democratic nominee is Hillary Clinton or, as appears less likely, Bernie Sanders, a president from that side of the aisle would probably mean a continuation of the status quo established by the Obama administration as far as Keystone XL is concerned, says Tim Pickering, CEO and lead portfolio manager at Auspice Capital in Calgary. Clinton, he notes, has been vocal against Keystone XL. Sanders is also strongly against it.

A Republican winner in November, suggests Pickering, would be more likely to change course and reopen the issue. Keystone XL “is definitely not dead,” he says. The U.S., he adds, has laid about 10,000 miles of pipelines since plans for Keystone were first filed.

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Canada’s the largest importer of oil into the United States—twice the daily level of Saudi Arabia. “So, this oil is very important to America […] and its energy security,” says Pickering. Canadian crude is also some the cheapest oil our friends to the south can get.

Pickering adds that compared to other suppliers, such as Saudi Arabia, Canada shouldn’t concern those who look beyond economic calculations when considering whom to buy from. “We’re just such a good deal for [the U.S.]. We’re a cheap barrel, we’re safe and we’ve got no human rights violations. The only thing they can jam at us is [the] environmental [issue]. But there are environmental issues everywhere and Canada’s track record, standards and development in that area are ahead of most of the world.”

Other American policy concerns—the broader economy, immigration, healthcare—will likely dominate political discourse during the campaign and after a new president takes office. But the how of access to Canadian crude will still be on the agenda.

“It’s an opportunity for our leadership, whether provincially or federally, to say, ‘Look, this is the safest barrel on earth and it’s your primary source. If you’re not willing to give us fair market access, then we’re going to look for other market access.’ ”

How bad is it?

Could oil prices drop further? Pickering says yes, but the situation may not be as dire as some think.

Read: How to communicate with clients during bad markets

Global demand remains robust, even from a slowing China. The key problem is oversupply. But that supply overhang is only between one million and two million barrels a day. To put that in context, when there was an oversupply problem in the 1980s, the overhang was about 14 million barrels a day.

“Things can happen quite quickly to bring supply and demand back into balance,” says Pickering. There will be Canadian oil players who take some production offline. The Bakken play in the U.S. is also seeing cuts. “So conceivably, right here in North America you could bring a million barrels a day off. Things are lining up so that the supply and demand imbalance is going to come back in line at some point. When? That’s the million-dollar question, but the right things are happening, and first among them is that we do have demand.”

So, while the near-term outlook is still questionable, the long-term outlook is positive, says Pickering. “The downside is now more limited than the upside potential.”

If clients are thinking of participating in any future price upturn, think carefully about the vehicle by which they do so. If they try it via resource stocks, they may not get what they bargained for.

Why?

When you buy an oil company stock, you’re buying a management team, a balance sheet, and other factors completely extraneous to the price of oil, notes Pickering. You’re also buying a correlation to the broader stock market. As a result, the price of oil could climb, but that increase may not be reflected in the performance of oil company stocks. In fact, if the stock market as a whole drops, it could take oil stocks with it, regardless of any increases in the price of oil.

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