Low $30 Oil and the effects on the Alberta Oilsands

Why is oil at US $30 and what effects will it have on Alberta Oilsands

It is Feb. 12 and US oil prices have settled at US $33.98 a barrel. What has happened to the price of oil and can Alberta oilsands companies still remain profitable at this level? The price of oil fell 5.5% to settle at its lowest point in recent memory. We seen the US price of oil fall from $140 US a barrel in less than 6 months to $33 US a barrel. Can the Alberta oilsands companies survive this level of low oil prices? It has been the uncertainty of the future price of oil that concerns Alberta oilsands companies and not the current price levels we see in the market. It is in this unstable financial market that we the halt of further development of any new Alberta oil sands companies’ projects and a stand still in development. While many companies including large oilsands companies Syncrude Oil continue to be optimistic of the future, many smaller oilsands companies have had to file bankruptcy. What is a sustainable level of US oil prices a barrel and will there be a mass file for bankruptcy soon for this industry?

Large inventory of Oil means continued low US oil price per barrel

It is a straight supply and demand equation for why oil prices are low right now. The financial crisis can be blamed for this but so can the rapid rise in US Oil prices per barrel and the frenzied speculation we have seen for investing in anything related to the Alberta oil sands. Currently we have a glut in demand leading to a stockpiling and buildup of inventory in the US and the world. We frankly have record levels of inventory of oil meaning that the US oil price per barrel remains low. Until this glut is consumed and demand for oil resumes, we will continue to experience record low levels for US oil prices. It is hard to imagine a situation like this since we have been so accustomed to the opposite. The demand for oil has been so robust leading to the quick and rapid development of the Alberta Oilsands. The Alberta oil sands represents a significant source of Oil and is only second to Saudi Arabia. However, with the current glut and oversupply we are seeing the slowdown of massive proportions. In the US we expect to continue to see a glut in demand as unemployment data continues to be negative and the forecast the same for the next few months. More and more people will choose to conserve and thus the US oil price per barrel will be at $30 or even lower to come.

Can global demand for oil shrink in 2009

Aside from the question of a glut of demand for oil in the US is the bigger question of the world demand. What is going to be the demand for Oil from the world in 2009 and 2010? There are many reports from well known International Agencies reporting that the demand for oil in the world will shrink to levels in the early 80’s. This means that we may see a low US oil price per barrel for some time to come. What will the global demand for oil mean to Alberta oilsands developments? It is a hold and see approach for 2009 and possibly the first quarter of 2010 as major Alberta oilsands players are reacting to the numbers of global demand. If the demand for oil continues to shrink in 2009 then we will see a low level of economic development in Northern Alberta, Athabasca regions where development has been brisk for the last 5 years. While no one can see the future, it is the job of companies such as Shell, Syncrude, and Imperial Oil to forecast the demand and thus the development schedule of oilsands development. It is these large Alberta oilsands companies that can change their production and development schedule to closely match global demand.

Canadian Oil Sands Trusts and Alberta oil prices

Dividends cut at Canadian Oil Sands Trusts in Alberta

Canadian Oil Sands Trusts invests in Northern Alberta and provides a regular dividend to its investors. Recently, Canadian Oil Sands Trust announced a cut in their regular distribution to its investors. In fact this cut in distribution to its investors was more than expected by the market. Canadian Oil Sands trusts slashed its regular distribution in response to Syncrude Oil’s cut in its quarterly distribution by 80% to 0.15 per unit. Canadian Oil Sands Trust is the largest investor in Syncrude Oil, a major oil sands player. This cut in distribution by the company may lead to increased selling pressure of the company’s shares as investors who are looking for higher yielding shares sell their stock. Canadian Oil Sands trusts has been a high yielding income play of the Alberta Oil Sands and has been able to deliver a high return to its investors. But with the recent financial crisis and the fall in Alberta oil prices to sub $50 levels, this has caused increased pressure for all Alberta oil sands company to slash their quarterly distributions.

Alberta Oil prices and Canadian Oil Sands Trusts

How linked are Alberta oil prices and the prices of shares of Canadian oil sands trusts? There is obviously a very close relationship between the level of Alberta oil prices and Canadian oil sands trusts. As the price of oil falls, the income levels of the companies that the Canadian oil sands trust invests in is significantly reduced. Companies such as Syncrude Oil is one of the companies that has had to aggressively slash its quarterly dividend in order to maintain its financial position. Other Alberta oil companies will surely follow suit and this will lead Canadian Oil Sands Trust to have less income to distribute to its shareholders. However, the price of oil is expected to stabilize around the $50 level with increases expected in 2010. Most analysts currently have a long term buy on Canadian Oil Sands Trust investment as this represents a cheap buy in the current market. However a short term sell is also recommended for this stock.

Canadian Oil Sands Trusts as Investments

Canadian Oil Sands Trust gives investors in Alberta Oil with a solid Oils Sands investment through its 36.74% interest in Syncrude Project. Syncrude Oil is a leader in the Alberta Oil Sands industry and has been in operation since 1978. Currently Syncrude Oil can produce Alberta light high quality crude oil at 350,000 barrels per day. Syncrude Oil operates oil sands operations in the northern Alberta region of Athabasca. By investing in Canadian Oil Sands Trusts as an investment vehicle, investors get a high quality Alberta oil sands investment and can take part in the growth of the oil prices. Canadian Oil Sands trusts provide a regular dividend that gets paid back to investors as a distribution and a return of their initial capital. By returning a larger percentage of an investor’s investment over time, the return on Canadian Oil Sands Investment is seen as a conservative investment.