WTI crude opened this morning at $40.25 per barrel and is still making gains. This is a 4.5 percent increase from last week when it closed at $38.50. Yesterday was the first time this year oil prices traded above the $40 mark, a 53 percent recovery from the Feb. 11 low of $26.21 per barrel.
Is the industry ready for a price recovery?
The price recovery is great for the industry, but poses a threat to itself. Higher prices may encourage producers to continue to increase output. Increased output may cause oversupply again, the reason the prices plummeted in the first place. The Russian central bank chose to hold interest rates and warned of inflation because the oil prices are currently “unsustainable”, as reported by CNBC. According to a Wall Street Journal article, analysts estimate a global surplus rate of 1-2 million barrels per day. Saudi Arabia exported more oil in February than January, the opposite of the expectation when the country talked about production freeze.
Another reason oil prices found an upward turn is a missing 800,000 barrels of oil per day from last year. A Wall Street Journal article notes these barrels were unaccounted for by the International Supply Agency and they may never have existed. Some think they may be in China while others argue flawed accounting practices may be the reason there are missing barrels. Regardless, the missing barrels allow a price increase as the actual supply is closer to the demand.
Energy sector influences Dow Jones industrial average and S&P 500
This week, both the Dow Jones and S&P regained their year-to-date losses and are on track to make their largest quarterly comeback since 1933. The stock market mirrored the oil commodities and hit its low Feb. 11. It has since recovered. According to CNBC, Erin Gibbs of S&P Capital IQ said, “If oil can stay above $40 it will really help earnings growth.” But the risk is a double bottom similar to what happened late last year when the stock market crashed back down to previous lows in October after an August and September short-term recovery. Oil prices will influence whether or not this happens.
TransCanada buys Columbia Pipeline
On Thursday, France 24 reported TransCanada will acquire the Columbia Pipeline Group. The Canadian pipeline operator behind the Keystone XL pipeline will pay $13 billion U.S. dollars for the Houston-based company as well as taking on the $2.8 billion in debt Columbia Pipeline Group currently holds. TransCanada Corporation (NYSE: TRP) opened at $37.09 this morning, a slight drop from yesterday’s $38.08 close, but 3.14 percent higher than its closing price last week at $35.96 per share. Meanwhile, Columbia Pipeline Group (NYSE: CPGX) shares opened at $25.15 a significant 9.54 percent increase from the $22.96 per share CPGX closed with last Friday. The buyout promises shareholders an eleven percent premium of Wednesday’s closing price, which totals $25.50 per share.