The Energy Report: Please give us your overview of the oil and gas markets.
Steve Palmer: Right now, there is a supply/demand imbalance: Too much supply for both gas and oil. The imbalance has created downward pressure on the price of both commodities. Investor sentiment is quite negative in the space, which is shortsighted.
TER: Does the low price of energy have a positive effect in terms of industry being able to make products cheaper?
SP: There are industries that benefit from cheaper energy—airlines, transportation, some manufacturing. But in Canada, energy production and export are a big part of our economy, so the downside of the price decline overwhelms the benefits of lower energy prices.
TER: Will oil and gas prices gravitate to equilibriums?
SP: Yes—oil and gas prices are in the process of finding equilibrium. Prices go into freefall when the market overreacts, and then they bounce up. Oil went from $95/barrel ($95/bbl) to $45/bbl. It is not going to bounce back to $90/bbl in the near term, but it seems to have found a bottom and should settle in a new range, likely higher than current levels, within the next few months.
TER: At what equilibrium price can a junior exploration and production company remain profitable?
SP: Each company has its own economics. It is very hard to predict exactly where the oil price will settle. Nobody predicted that it was going to collapse to $45/bbl! My guess is that oil will trade up to the low $60s, and sit there for a bit.
TER: What do these price fluctuations mean for the Canadian small-cap energy market, in which you specialize?
SP: It is not a very pretty sight. A lot …read more