Saudi Arabia, the “central banker of oil,” usually cuts its exports to keep oil prices high when there’s a global glut. Not this time.

Why is it encouraging lower oil prices to stay low? Some say to hurt geopolitical rivals Russia and Iran. Others say its sights are set squarely on reversing the growing fortunes of shale oil in the U.S. and oil sands in Canada. The Saudis, as usual, remain inscrutable on their strategy.

Whatever their motives, they’re not lifting a finger to take the tarnish off black gold, which is now down more than 38% since late June. In fact, the Saudis seem to be increasing the pressure to drop oil prices more.

Late last week Saudi Arabia cut January prices for U.S. and Asian buyers as the kingdom made it even clearer that it’s digging in for a price war to defend market share amid lower prices. Saudi Arabian Oil Co., also known as Saudi Aramco, on Thursday reduced its official selling prices for all oil grades bound for Asia in January by between $1.50 and $1.90 a barrel, compared with December. It also cut prices for all crude grades to the U.S. by between $0.10 and $0.90 a barrel.

Crude futures were down early on Friday but erased deeper losses following a stronger-than-expected U.S. jobs report for November.

OPEC’s biggest producer now expects Brent crude to stabilize at about $60 a barrel, which is a level the Saudis can stand. But Russia needs crude at $101 a barrel to break even. Venezuela and Nigeria need $120. Iran needs $136.

By bringing economic pain to those countries, Saudi Arabia and OPEC are playing a dangerous game. Budgets of these and many other countries are already under stress, and as profits dry up their governments lose one of their major tools to quell civil unrest: subsidies in everything from food to energy to low taxes. 

We’re not being paranoid when we say the U.S. and Canadian oil industries may be one of OPEC’s primary targets; the current global surplus of oil was brought about mainly by the success of unconventional oil production in North America.

A key question is whether new investments in unconventional projects are sustainable at current prices. Without that U.S. shale and Canadian oil-sands production, the price of oil won’t stay at current levels. It’s just a matter of how long it takes for North American producers to cut back in response to current prices. When they do, the price has to go back up—the rising global demand for oil will ensure that.

As my colleague Ari Charney said in last week’s Maple Leaf Memo: “It may be tempting to throw in the towel, but we’ve endured such downward volatility in commodity prices before. That’s why it’s important to take a long-term perspective, even though recent news on this front has been positively gut-wrenching.”

Tight Oil

The renewal of growth in U.S. oil production has been driven by new technologies that tap long-known, but hard-to-get, reserves trapped in shale formations—so-called tight oil.

The technology has grown so efficient that even with the lower prices, many producers can still make a profit. Data from North Dakota sources indicate the average cost per barrel there is $42, and that leaves room for a 10% return for rig owners. In McKenzie County, which has 72 of North Dakota’s 188 oil rigs, the average production cost is just $30. Another 27 rigs are around $29. 

Production from the Canadian oil sands has also contributed to the global oil glut. Canada has increased its production of oil by a million barrels a day over the last decade, and almost all of that increase has come from oil sands. But the break-even price for new oil-sands surface mines is among the most expensive in the world, at around $85 a barrel, according to the Bank of Nova Scotia.

Operating costs at the actual mines are less than half that amount. But the break-even point for so-called in situ projects, in which bitumen is heated and pumped up to the surface, range between $40 a barrel and $80 a barrel. Such projects represent most of future growth.

For Canada, the pressure on new production is a little more intense. But prices would have to stay this low—or lower—for longer to meaningfully cut production plans.

In fact, as we note in this month’s In Focus feature, some Canadian oil and gas companies, including Crescent Point Energy Corp. (TSX: CPG, NYSE: CPG) and Vermilion Energy (TSX: VET, NYSE: VET), are on the hunt for acquisitions amid the downturn.

Job Boon

The U.S. got an early Christmas present Friday when unexpectedly strong job growth was reported. A strong U.S. economy is good news for Canada.

The U.S. Department of Labor Bureau of Labor Statistics reported Friday that we added 321,000 new jobs in November, quashing the consensus forecast. It’s the biggest single-month job gain for the U.S. economy since January 2012. 

And almost as important as more people going back to work is rising wages. Average hourly earnings rose by 9 cents from October, to $24.66. 

In This Issue

This month’s Best Buys are both “clean” companies. And both have significant exposure to the U.S. Conservative Holding Brookfield Renewable Energy Partners LP (TSX: BEP-U, NYSE: BEP) is one of the largest publicly traded pure-play renewable power producers in the world.

New Aggressive Holding Progressive Waste Solutions Ltd. (TSX: BIN, NYSE: BIN), meanwhile, is one of North America’s leading non-hazardous solid waste haulers.

Brookfield Renewable generates 55% of its 6,700 megawatts of total capacity in the U.S., and Progressive Waste derived 62% of its 2013 revenue from American customers.

That’s a key advantage in light of U.S. economic growth.

In Portfolio Update, I explain the steep sell-off in Noranda Income Fund (TSX: NIF-U, OTC: NNDIF) units and the intrigue surrounding it. The units suffered a 60% crash after management reported third-quarter financial and operating results on November 12.

The numbers were actually solid. But management’s new commentary on the circumstances surrounding the May 2017 expiration of its zinc concentrate supply contract with Glencore Xstrata PLC unit Glencore Canada  has stoked investors’ fears about the the company’s processing facility.

There’s considerable risk here, as we’ve noted in past issues. But there are other factors at play, including the fact that Glencore has a 25% stake in Noranda. Note, too, that Glencore made a previous attempt to take Noranda private. 

We’re sticking with Noranda. But we are cutting one of the real estate investment trusts we own in the Conservative Holdings.

Dream Office REIT (TSX: D-U, OTC: DRETF) is a solid operation with an attractive portfolio. The trouble is at the macro level: According to CBRE, the Canadian office segment has experienced a significant rise in vacancies over the past year, and vacancy rates could face upward pressure in the near term due to new supply coming on line in 2015.

We round up third-quarter earnings reports from Dream Office, its affiliate Dream Industrial REIT (TSX: DIR-U, OTC: DREUF), Canadian Apartment Properties REIT (TSX: CAR-U, OTC: CDPYF), EnerCare Inc. (TSX: ECI, OTC: CSUWF) and Ag Growth International Inc. (TSX: AFN, OTC: AGGZF).

In Focus zeroes in on a critical consideration for Canada-based oil-and-gas exploration and production (E&P) companies in the CE Portfolio Aggressive Holdings amid falling commodity prices: their hedging strategies.

In addition to maintaining relatively strong balance sheets, all three oil-focused E&Ps we hold—Baytex Energy Corp. (TSX: BTE, NYSE: BTE), Crescent Point Energy Corp. (TSX: CPG, NYSE: CPG) and Vermilion Energy Inc. (TSX: VET, NYSE: VET)—have “sold forward” significant portions of their forecast production for 2014, 2015 and beyond, locking in prices that should help maintain stable revenue, cash flow and dividends.

Dividend Watch List, meanwhile, details the fate of one E&P that doesn’t hedge production: Canadian Oil Sands Ltd. (TSX: COS, OTC: COSWF).

Last week management announced a 42.9% dividend cut.

In Closing

We’ve received much positive feedback in the aftermath of the changes we made to CE introduced in the October issue. We’ve also received some very constructive criticism.

As always, we welcome your comments, questions and suggestions on these changes and any other issues or concerns related to the service.

Please let us know what you think or post any questions you may have to the Stock Talk forum at www.CanadianEdge.com. We’ll be sure to post a reply within 24 hours.

Note that the next installment of my monthly online chats with subscribers will take place on January 28, 2015, at 2 p.m., as we take December off in observance of the holiday season.

Go to www.InvestingDaily.com/Canadian-Edge/live-web-chats/ for more information and to sign up to receive an e-mail notification for the event.

I stick around to answer just about every question asked, so if there’s something on your mind that’s not addressed in an issue or on the Stock Talk forum, this is a great opportunity.

Everyone at Canadian Edge extends warmest wishes to you and yours for the holiday season.