Canadian Oil

[Arctec]

ENERGY STRATEGIES

While it rarely pays to count on mid range weather forecasts, talk of a late January cold blast and talk of extremely warm 2007 could be suggesting that overall energy demand for 2007 could end up being stronger than current expectations. It should also be noted that the excess crude stocks situation in the US has been dramatically altered over the last three months, that Russia is considering an oil production cutback, and perhaps most importantly that sub-$54 crude oil pricing might begin to change attitudes inside OPEC. With the US crude stocks going from a burdensome 23 million barrel surplus in mid October to a current deficit of 9 million barrels (as of January 5th), one could conclude that a large portion of the US crude oil surplus condition has been remedied. With Venezuelan President Hugo Chavez recently moving to nationalize more US businesses in his country, it would certainly seem as if his regime is set to expand its socialist grip on that country, and that could eventually result in some domestic unrest, which in turn could end up threatening the flow of Venezuelan supply. However, we would suggest that the prospect of additional OPEC production cuts, regional oil shortages in Eastern European markets and perhaps a significant reduction Canadian Natural gas exports will end up being the forces that finally bring about a solid bottom in energy prices. In the near term, the market remains vulnerable to mild weather, macroeconomic concerns and the fact that the most recent US weekly inventory readings showed moderately large builds in product stocks. In short, we think that oil prices have moved into the bottoming range or more appropriately into a strong fundamental value zone and that a return to normal weather might be enough to end the long liquidation. In fact, with the chance of a January 20-22 Artic cold blast pushing down into the heart of North America, it is possible that the shorts will soon be presented with a change of conditions. Some traders think that a late burst of cold air will only push US January energy demand up toward average levels and therefore one should probably not be in a hurry to pick a major bottom in energy prices. However, the contraction in US crude oil inventories over the last three months is a major fundamental development, and if we had to guess, we would say that the change in the US crude stocks surplus condition was a primary reason by many OPEC members were not inclined to live up to their production cut promises. In the end, we think the Russian/Belarus conflict and the threat of reduced Canadian Natural gas exports will be the source of a coming major bottoming in oil prices. In the meantime, we can't rule out a spike down washout to the $50.00 level, but at the lower level some marginal oil production would be called into question, and we would assume that OPEC would quickly get over its shortcomings and rise to the occasion. Some OPEC members like Iran are already seeing a shortfall of revenues at the rate of $688 million per month (as compared to the end of December), and down by $1.9 billion per month from the 2006 highs. Usually OPEC decides to act when other factors (perhaps a change in the US weather) are already providing the basis of a bottoming, and that is why the oil market tends to form violent bottoms. We also think that the January price collapse resulted in a large portion of the speculative money being washed out of energy plays and that is it is now time for the real bullish fundamentals to kick back in.