Oil, Gas and Canadian Trusts Update
by Bruce Zaro
Last week’s announcement from Canadian Finance Minister Jim Flaherty that the royalty trust structure would essentially be abolished after 2011 sent the market into a panic, and rightfully so. Having let the initial shock of this announcement play out over the last week or so, I thought it might be a good time to take a quick technical peek at some related indices.
As an aside, we have gained the exclusive right to bring you a special report on last week’s Canadian royalty trust announcement from Roger Conrad, one of the leading experts on this industry. His report contains a discussion many individual energy trusts and can be downloaded here: http://www.deltaga.com/reportForm.asp?rep=4
Now, a look at some charts:
S & P /TSX Composite Index – TSE
Investor piled out of Canadian stocks last week in response to the new tax legislation on income trusts, but did this cause any dramatic technical damage to the Toronto Benchmark , the TSE? Early chart action would say no, but the next move in the coming weeks could be more telling. The TSE carries a heavy weighting in income trusts and more than $20 billion in value was erased from that group last week. However, it looks like this downdraft has so far allowed more opportunistic entry points for investors here as the TSE consolidates its recent rally from formidable support in the 11450 range. Expect more consolidation at the midpoint of its recent range– around 12,000—as investors sort this out, but opportunities will likely result. On the other hand, a break below 11,140 would warrant defensive action.
NYMEX Crude Oil (CRUDE) – 59.15
Longer term, price action of the energy trusts will be more closely tied to the underlying commodities rather than one-off news events, so what does crude oil look like, technically, after a volatile summer and fall? The good news is that crude has started to bounce from that level in the high $50’s yet again. Last summer and fall marked the first instances in which the line in the sand was drawn in this area and it was revisited just a few weeks ago. More good news: the price momentum of crude recently turned positive after having been negative for 12 weeks. The bad news, however, is that the trend remains decidedly negative after breaching the $69 support in September. Traders might place stops below recent lows in the mid-50’s since further retrenchment to low $50’s / high $40’s could become possible if that area fails to hold.
Natural Gas Continuous (NG/)
Many of the Canadian energy trusts are large gas suppliers to North America. How is its pricing? I have written on more than one occasion about the seasonality of natural gas, but this year is looks as though the September lows may have marked a meaningful low. From that $5.40 bottom in September, natural gas has recovered, bouncing nearly 50% to over $8 today. Remarkably, this commodity has resumed a positive trend with this move and a reach toward double digits looks very likely. We would be sellers of partial positions in the $10-11 range should it get that high, but the natural gas-focused energy trusts, some of which looked at risk of further distribution cuts just a few weeks ago, may represent very interesting values at this time since they’re still languishing near their lows.
All charts courtesy of www.stockcharts.com
Over his 20-year investment career, Mr. Zaro has become a highly-regarded technical analyst who runs private client portfolios at Delta Global. He recently served as the Managing Director of Granite Wealth Management outside of Boston and spent nearly 15 years prior as a Vice President at Gage Wiley & Co. His current firm is full-service, but specializes in providing international market access as well as alternative investment strategies. In addition to U.S. market coverage, Mr. Zaro applies his expertise in technical analysis to stocks and stock markets around the globe.
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December 6th, 2023
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