A pumpjack sits on the outskirts of town at dawn in the Permian Basin oil field on January 21, 2016 in the oil town of Midland, Texas.Spencer Platt/Getty Images
Canadian stocks and the loonie mounted big rallies as crude oil bounced from recent lows, leading some market players to wonder if the worst of the rout might be over.
Optimism leaked into beaten-down markets after bullish comments by the European Central Bank's president, although some investors chalked up gains to covering short positions or paying for previous bets that shares and commodities would weaken.
"The market was so oversold. The sentiment was so negative," said Laura Lau, portfolio manager at Brompton Funds. "Everybody's been watching how oil reacts, and as it starts stabilizing, everything's better in the world. Yesterday, the market turned – it started off very negative, then it started to turn. So it's good to see lots of follow-through today."
The activity showed some rare pep as investors have grown concerned about the state of the Canadian economy because of the collapse in energy markets and squelched growth and employment in oil-dependent provinces. Consumers have also fretted about the reduced buying power of the Canadian dollar.
On Thursday, crude surged more than 4 per cent despite bearish factors, including a big gain in already-bloated U.S. inventories and the impending return to Iranian oil exports.
West Texas intermediate settled up $1.18 at $29.53 (U.S.) a barrel. The jump helped to propel stocks more than 220 points at one point in the session, led by energy producers. The S&P/TSX composite index ended up 193 points.
The Canadian dollar, which is highly influenced by movements in oil and other commodities, rose more than full cent to 70.03 cents, after sinking more than 4 per cent since the start of 2016.
"People who were short Canadian dollars are buying those positions back," said Shaun Osborne, Bank of Nova Scotia's chief foreign exchange strategist.
At play, along with oil, was the fact that the Bank of Canada decided on Wednesday not to cut its benchmark rate, and expectations for a move down the road are fading.
Crude markets shook off rising inventories in the United States and were lifted by a renewed sense of confidence that the global economy is not in as bad a shape as the pessimists fear.
The rally was sparked by comments from European Central Bank president Mario Draghi that the bank would do what is needed to boost growth, fuelling hopes for more quantitative easing.
"This is a Mario Draghi rally," said Phil Flynn, senior analyst at Price Futures Group in Chicago. "Draghi talked the market down from jumping off the ledge."
Mr. Flynn said the slump over the past couple weeks was a result in large part of fears about a global slowdown, more than the arrival of more Iranian oil in the market or rising U.S. stocks.
The U.S. Energy Information Administration reported that commercial crude stocks increased by four million barrels over the previous week and remained near an 80-year high, significantly above the average of the past five years.
"The fundamentals are still weak and you still have worries about economic growth and its impact on fuel demand, so this is probably a sign that things have been overdone more than anything else," said Gene McGillian, analyst at Tradition Energy in Stamford, Conn.
Some energy stocks shot to double-digit percentage gains, including Baytex Energy Corp., Paramount Resources Ltd. and Penn West Petroleum Ltd., all of which had skidded as crude slumped and worries grew about high corporate debt levels.
Producers have started to claw back already-miserly capital spending budgets, including Husky Energy Inc. and Whitecap Resources Inc. On Thursday, Pengrowth Energy Corp. cut its budget 70 per cent and suspended its dividend and any new drilling.
The futures market does not currently offer prices above $40 a barrel until April, 2018, which means companies have little opportunity to hedge output to their advantage.
"What are you going to do? Are you going to lock in a price at which your plays are uneconomic?" asked Mason Granger, fund manager at Sentry Investments. He said he fears further oil-price weakness as inventories rise when refineries begin maintenance in the spring.
The Bank of Canada said this week that it expects overall spending in the energy sector to fall an average of 25 per cent this year, after declining 40 per cent in 2015.
