The Canadian energy sector is currently trading at a significant discount to long-term average valuations, according to Stu Morrow, chief investment strategist for Morgan Stanley Wealth Management Canada. In a two-part report published on Thursday, Morrow focused on the sector’s role in net zero emissions commitments and provided data about future global oil consumption.
Morrow stated that the pessimistic outlook of the energy sector reflects uncertainty related to future oil and gas demand. However, he believes this does not account for the potential narrowing of the West Texas Intermediate and Western Canadian Select crude price differential, referred to as the ‘WTIWCS differential’, over the near term. Additionally, he pointed out a decrease in growth investments of renewable technologies over the long term.
According to data from the International Energy Agency (IEA), total global energy demand will rise while oil’s market share will decline over time. Despite this trend, the net demand for oil has increased. The IEA predicts an annualized improvement in energy intensity of 2.4% from 2021 to 2030, leading to a gradual decrease in oil demand which is expected to peak at 107 million barrels per day by 2033. This is still higher than the 99.2 million barrels consumed in 2022.
Meanwhile, on Wednesday, despite strength in energy stocks as oil prices climbed higher, Canada’s main stock index declined by more than 100 points. The S&P/TSX composite index was down 120.17 points at 19,435.98 due to broader market losses.
Several factors contributed to this pullback, including rising oil prices which rallied above $90 per barrel on Wednesday. The November crude contract was up $2.92 at $93.31 per barrel, marking a new high for the year. Analysts have revised their forecasts recently, suggesting that triple-digit oil prices may now be expected this fall due to strong global demand.
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