As a follow up to an article I posted on April 24 citing significant long-term headwinds to Cenovus Energy Inc. (TSX:CVE)(NYSE:CVE), I will be looking at yet another headwind for the Canadian integrated oil and gas company moving forward. In addition to the prevailing long-term headwinds for Cenovus mentioned in my previous article, it appears that medium- to long-term downward pressure on oil prices stemming from a continued supply/demand disparity is likely to continue in part due to recent reports coming out of the proposed U.S. budget this week.
U.S. budget calls for strategic reserve sell-down
In a bid to increase spending and revenues simultaneously, the current budget put forward by the Trump administration has called for half of the country’s strategic petroleum reserve to be sold off into the market over the next 10 years. While this proposed course of action is tapered over time, the significance of the size of the current reserve is something that long-term traders will likely take into account over the coming days.
With approximately 344 million barrels of oil set to be put into a market with a substantial supply glut (approximated to be around 300 million barrels of oil), this announcement is likely to provide oil investors with long-term headaches moving forward.
Softening global oil prices a concern for Cenovus
As I wrote about in my April 24 article, continued pressure on OPEC countries to cut production to bolster the global price for crude has resulted in some stability in oil prices of late. In the article, however, I talked about some of the differences between the crude oil that Cenovus sells with the types of crude oil traded globally.
While Western Select is a very different product than Brent or WTI crude, the price for Western Select is largely a function of the broader prices of crude oil traded globally. The fact that Cenovus is operating at a disadvantage to other producers in its ability to extract value from the end product it ships (it sells the vast majority of its product at a discount to other global producers) is an issue that becomes exaggerated when the global prices of Brent and WTI fall. Thus, the worries about a supply glut that can potentially double in size is something that Cenovus investors should take very seriously.
Cenovus is operating in a very difficult environment, given the current supply and demand fundamentals of the global oil market. In my opinion, betting on the long-term success of a large Canadian oil and gas concern such as Cenovus in the current landscape amounts to a very speculative play, and one which I am not interested in pursuing. I expect Cenovus’s share price to continue to see weakness moving forward and would suggest long-term investors look for a more attractive entry point down the road.
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Fool contributor Chris MacDonald has no position in any stocks mentioned.