We’ve written extensively about how oil prices have had a direct impact on Edmonton’s commercial real estate market, but along with mainstream media, we have been pretty quiet about oil prices over the past few months. This week, however, we saw oil prices climb over $50 / barrel to their highest price since May. If you own any energy stocks, you’ll likely have seen a corresponding increase in prices. Anecdotally, we also saw an increase in phone calls and property tours this week. While a pick-up in activity is typical this time of year, it was no doubt at least partly influenced by a bump in oil prices.
While we can’t speak for the media, sensationalism tends to be a hot topic, and oil prices simply haven’t been exciting as of late. In fact, going back to 2015, oil futures have been hovering around $50 / barrel (WTI:$USD). With the exception of a short-lived dip in early 2016, oil prices haven’t been below $40 / barrel or above $60 / barrel since the summer of 2015.
When oil prices dropped from $140 / barrel in 2008 to $40 / barrel in less than a year, that was newsworthy. When prices dropped in half from over $100 / barrel in 2014 to $50 / barrel a few months later, that was also newsworthy. When prices have been hovering around the same price, +/- 10 – 15%, there isn’t much to report on. That’s not to say “experts” aren’t still trying to predict the future. Over the past three years, some have suggested that new capital spending / drilling activity is down so the under-investment will result in a spike in the near future. Others have suggested oil demand will be irrevocably tempered due to the emergence of electrical vehicles, and we’ll see further downward pressure on prices as a result.
While it’s difficult to quantify exactly how much of an impact oil prices have had on the commercial real estate market as a whole, it’s quite simple to see how publicly traded companies with heavy exposure to the commercial real estate market have fared.
Take Melcor for example. Headquartered in Edmonton, with roots dating back to 1923, Melcor develops land, retail, office and industrial properties across the City. With thanks to Jon Germain at Richardson GMP, we overlapped the stock price of Melcor (tse:MRD) with the price of oil. When the price of oil started falling in 2014, Melcor’s stock price looks to have shadowed it month over month. While commercial real estate prices did not see the same drop off in values in 2014, we would suggest the market itgenerally chugging along at the same pace as Melcor’s for the past few years.
As a final note, a list of 24 recent oil price forecasts show a tight dispersion around a $52 / barrel estimate for 2018. As we’ve mentioned previously, these predictions have about the same prognosticating power as a Tarot Card reader, but most of these forecasters expect we’ll have another year of oil prices similar to the previous three.