Our Prediction is Close to Reality

A few months ago, when oil was hovering in the low $50’s, we made a prediction that oil would rise to $70 sometime in 2018.  Some people scoffed.  Others laughed.  Our own friends started sending our calls straight to voicemail.  We even lost 15 followers on Instagram.  Okay, maybe we have a flair for the dramatic, but many believed there was an imposed ceiling on the price of oil as US shale producers could (in theory) ramp up production whenever prices started increasing.  Despite OPEC and Russia agreeing to cuts in production, it could all be for naught if producers in the US could quickly mobilize to offset the cuts.  While we weren’t oblivious to that notion, we made our argument solely on the basis that Saudi Aramaco is planning the world’s largest IPO sometime in 2018, and when the underlying value that company is oil, it only stands to reason that they will be unwaveringly incentivized to maximize the price of oil.  We have no way of knowing all the different mechanisms that Saudi Arabia could have at their disposal, but they have an obvious influence over OPEC and Russia.

Now it’s too early to call us geniuses (especially since we’ve made a wrong prediction or two in the past!) but oil prices have since risen roughly 20% to currently sit above $63 / barrel (WTI:USD).  There’s still a ways to go – and there could always be a reversal – but we believe oil prices will rise to $70 sometime in the near future.

Now what does this mean for Edmonton’s commercial real estate market?  We have documented extensively how Edmonton’s market is directly correlated to the price of oil.  In short, our economy was robust leading up to the now infamous decline in oil prices in the fall of 2014.  In the few years that have followed, we saw numerous corporate bankruptcies, downsizing and a general sense of pessimism.  We saw increased vacancy rates, lower absorption rates and falling rental rates.  We have no doubt whatsoever that this market calamity was caused by low oil prices.

With our province coming off the worst recession in the past few decades, there is light at the end of the tunnel and the rebounding price of oil will undoubtedly be a catalyst for increased economic activity.  Anecdotally, we are seeing this in our own business.  While the first half of January has been historically a slow period, we’ve had a noticeable pick up in call volume, property tours and offers.  This is supported by a recent report by the Canadian Federation of Independent Businesses, which shows business optimism in Alberta is amongst the highest in the country.

Alberta Business Optimism

Like the majority of these businesses, we’re optimistic that 2018 will be a strong year.  Just as welcoming, our friends even started answering our calls again.


Disclaimer

Views and opinions contained herein are the sole opinions of the authors and should not be construed as real estate or investment advice.  We strongly recommend you obtain independent advice.  Information has been obtained from sources deemed reliable but is not warranted to be so.