To begin, we quoteth the Bard: “Blow, winds, and crack your cheeks! Rage! Blow!/ You cataracts and hurricanoes, spout/ Till you have drench’d our steeples-“
If you are a Canadian energy executive or perhaps a stockholder within an oil company, you may be feeling a bit like Shakespeare’s King Lear in the famous storm scene.
Like the addled king, you have been battered and beaten by the elements, undone by the betrayal of others (hello, Organization of the Petroleum Exporting Countries, and your diabolical plot to help keep oil prices down), and merely within an all-round negative mood.
Like Lear, too, you might be thinking apocalyptic thoughts: With West Texas Intermediate falling below US$40 this month, maybe you’re hoping the world will indeed end and set you out of trouble of the misery.
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Come to consider it, almost any Canadian investor may be feeling exactly the same way at the moment.
Is there salvation ahead? Let’s turn to the skies for a sign.
And what do we have seen? You got it right: the Wrath of El Nino.
This is, after all, a year once the recurring weather cycle phenomenon should really warm up the Gulf of mexico and ring inside a generally warmer winter in North America, albeit with some wacky weather here and there.
As with previous El Ninos, that one is combined with some alarming predictions. One major U.S. news outlet recently trumpeted it “may trigger floods, famine and sickness in a lot of the planet.”
True, this year’s entry continues to be touted as a big one (and, yes, I know that’s contradictory, since El Nino means “little boy”), since ocean water climate is higher than they’ve been in a long time.
It’s recently been blamed for helping Patricia end up being the West’s strongest ever hurricane, for drought-like conditions in areas of Guatemala, and for the worst drought in Papua-New Guinea since 1997-1998 – annually in which El Nino’s effect was particularly strong.
Assuming this trend holds – and weather does have a means of defying expectations – investors might do well to remember that when extraneous factors impact markets, there are usually winners and losers.
For instance, El Nino has a tendency to create drier weather in Central Canada, more ice storms within the East, and much more snow on the West Coast. One beneficiary of that might be skiers in B.C. and the firms that run ski resorts there.
The stock of 1 such company, Whistler Blackcomb Holdings Inc., which owns 75 percent from the famous resort, is now trading near its all-time high of approximately $22.
El Nino also tends to impact commodities. Previously, El Nino-related droughts have raised grain and food prices generally. This year, though, global grain stocks are high, which might dampen any effect.
Another classic El Nino play is metal commodities, as flooding in South America has in the past led to mine outages. Now, though, miners are said to be better prepared.
Heavy flooding in Chile earlier this year put copper mines bankrupt only temporarily, and that we only need look at the price of copper now (it hit multi-year lows again now) to summarize that El Nino isn’t going to revive metals anytime soon.
As for oil, well, maybe we’d be better off forgetting 1997-1998, when prices slid to below US$20 a barrel. Expectations of the warmer winter stateside, lowering demand for fuel oil, have previously factored into crude’s recent slide.
But this worry might not tell the entire picture. A recent working paper authored by the International Monetary Fund discovered that El Nino shocks generally have a positive impact on energy prices.
One reason is that drought in Asia results in less production from hydroelectric plants and much more reliance on energy-intensive irrigation, which reinforces interest in oil.
The same study also found GDP rises in The united states, China and Europe following an El Nino. One reason: fewer weather-related disruptions (East Coast hurricanes, for example, subside in El Nino years).
Another is that consumers (by “consumers,” I mean Americans) tend to shop more when the weather conditions are warmer – which may be considered a welcome reversal from recent years, when harsh winter conditions in the first quarter kept shoppers home in droves.
These positive impacts aren’t insignificant. Based on the IMF, Canada enjoys a cumulative GDP boost of 0.85 percent within the four quarters after El Nino; the U.S. economy gets a 0.55-per-cent bump.
That growth, consequently, leads to increased oil demand, driving up prices. The study found that oil prices rise nearly 14 percent a year after El Nino makes an appearance.
Maybe there’s expect oil after all. Of course, a 14-per-cent increase from current prices would still put crude at only about US$43 a barrel.
But hey, any ray of sunshine is welcome right about now, is it not?