My TFSA Update April 2018

Last update on May 21, 2018.

Image Credit: Abraham Magnawa / Shutterstock.com

 

In this series, I (Jin Choi) talk about my goal of reaching $1 million in my TFSA account by 2033. If you want to know what a TFSA is, I recommend you read my free book.

 

April Results: Up 33.2%

At the end of April, I had $61,559 in my TFSA account, which was up by 33.2% since the start of the month. By comparison, the Canadian stock market went up by 1.8% while the U.S. stock market went down by 0.1% in Canadian dollar terms. Therefore, my portfolio outperformed.

The majority of my portfolio consists of oil and gas stocks. In April, oil prices rose from $64.87/bbl to $68.56 (in US dollars), and after months of being unresponsive to oil price changes, my oil stocks suddenly shot up.

Despite the impressive gains in April, I believe we’re in the early stages of the oil stocks bull market. (A bull market refers to a period of rising prices.) Oil prices are now north of $90/bbl when measured in terms of Canadian dollars, a level not seen since 2014. To show you how significant this is, and this is just  one example, Baytex Energy (ticker: BTE.TO), whose shares I own, will very likely earn close to $300 million a year at current prices. By comparison, the company is valued at just $1.4 billion as of the time of this writing.

Of course, there’s no guarantee that oil prices will hold these levels indefinitely. As expected, US shale oil companies are ramping up their drilling activities. Total US oil production is now some 1.4 million bbls/day higher than it was a year ago - a significant increase by any measure. Yet, that hasn’t been enough to swing the global supply/demand balance from deficit to oversupply. Inventories in the OECD countries declined by 27 million bbls in March, indicating that the deficit could be as much as 1 million bbls/day.

For the global oil supply/demand to balance, US drillers must increase their production still further. But it appears that the drillers have run into some significant roadblocks. For instance, pipeline capacity that connects the largest US oil basin to its major trading hub has maxed out, and it will take years to build more capacity. Drillers are coping by shipping their oil via rail and even trucks, despite the fact that those methods are much costlier than shipping via pipe. But even those alternative methods of transportation may reach their limits (lack of rail cars, lack of truck drivers).

As if that’s not enough, the Trump administration has decided to withdraw from the nuclear deal with Iran, which some people believe will reduce global oil production by 0.5 million bbls/day. Saudi Arabia pledged to plug the gap that Iran will leave behind, so some have argued that the collapse of the Iran deal shouldn’t affect oil markets that much. But Saudi Arabia doesn’t have an infinite capacity to produce oil either, and the reduction in Saudi Arabia’s spare capacity will make it harder for them to combat potential spikes in oil price down the road.

Taking the long term view, I think current oil prices are close to the equilibrium price. But as we’ve seen in the past, oil prices can stray far from the equilibrium price. We’ve experienced a few years where oil prices have been underpriced. We could soon begin a new period where oil is overpriced.

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