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Cheap Oil Crimps Canada ETFs


Canadian energy stocks and country-related exchange traded funds are sliding as the stubbornly low oil prices put into question the economics behind pushing forward the delayed Keystone XL pipeline.

The Guggenheim Canadian Energy Income Fund (ENY) dipped 2.8% Thursday. ENY has declined 16.6% over the past three months.

Broad Canada stock ETFs also weakened Thursday, with the iShares MSCI Canada ETF (EWC) down 0.8% and First Trust Canada AlphaDEX Fund (FCAN) 1.7% lower. Over the past three months, EWC has declined 5.2% and FCAN fell 7.9%. EWC includes a 23.3% tilt toward energy stocks and FCAN’s portfolio holds 37.5% in energy.

Additionally, the IndexIQ Canada Small Cap ETF (CNDA) fell 1.0% Thursday while iShares MSCI Canada Small Cap Index Fund (EWCS) declined 1.6%. CNDA has a 36.3% position in the energy sector and EWCS holds 25.4% in energy stocks.

With West Texas Intermediate crude oil futures trading around $74.4 per barrel, new wells in Canada may no longer generate a profit. The oil extracted from oil sands in Alberta, which would be transferred through a proposed Keystone pipeline to Nebraska and then to refineries on the Gulf Coast, would cost between $85 and $110 per barrel to produce, reports Tim Mullaney for CNBC.

“I would think that in order for new drilling projects to be capitalized and economical, the price of oil would need to be around $85 to $90,” Moody’s Analytics energy economist Chris Lafakis said in the article.

According to Rystad Energy, oil sands are among the most expensive sources for extracting oil, with minimum costs of an average $75 to $80 per barrel to produce.

“Anything not under construction [is] at risk of being delayed or canceled altogether,” Dinara Millington, vice president for research at Calgary-based CERI, said in the article.

Meanwhile, the Republican victory in Congress has increased the likelihood of passing the Keystone XL crude oil pipeline project. However, as oil prices remain depressed, more are wondering about the viability of going forward with the project. [Canada ETFs Rally As Republicans Plan Keystone Legislation]

The project may also come under fire in the months ahead as more market observers anticipate even lower prices. For instance, however Jonathan Hoenig of CapitalistPig.com argues that WTI futures could fall as low as $50 due to slowing global economy, reports Suzanne O’Halloran for Yahoo! Finance.

Goldman Sachs anticipates WTI prices to dip to $70 per barrel by the second quarter of 2015. The U.S> Energy Information Administration predicts that oil will average $77.75 per barrel next year.

Meanwhile, uncertainty over the supply response from the Organization of the Petroleum Exporting Countries, notably Suadi Arabia, along with a strengthening U.S. dollar could continue to weigh on oil prices as well. [Inverse ETF Ideas to Capitalize on Falling Oil Prices]

Guggenheim Canadian Energy Income Fund


For more information on Canada, visit our Canada category.

Max Chen contributed to this article.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Mr. Lydon serves as an independent trustee of certain mutual funds and ETFs that are managed by Guggenheim Investments; however, any opinions or forecasts expressed herein are solely those of Mr. Lydon and not those of Guggenheim Funds, Guggenheim Investments, Guggenheim Specialized Products, LLC or any of their affiliates. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.