2018 Oil Outlook
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Brian See, Vice President, Equities, CIBC Asset Management 

At the most recent OPEC meeting, what we learned was that Saudi Arabia and Russia committed to maintaining the production cuts that were established back in 2016. Now specifically what they did was maintain 1.8 million barrels a day of cuts for 2018, with the potential to revisit that deal three months later in June of 2018, depending upon the supply and demand dynamics in the oil market today. What we also learned was that Libya and Nigeria were introduced into the production cuts i.e. their production levels were actually capped at 2.8 million. Now this is important because those countries were allowed to ramp up production last year, and that was deemed as a risk to oil prices given they were allowed to grow their production bases. Now that those two countries have been involved or brought into to the deal with OPEC and Russia that helps alleviate the supply overhang and maintain stability to oil prices. So for Saudi Arabia, one of the things that we'll be looking for is a potential IPO of the state oil and oil company Saudi Aramco. Now market participants estimate about 5 percent of the total sale of the company, which would translate to about a 2 trillion dollar valuation. This is important because the new crown prince, he is diversifying the economy away from oil and into things such as health education infrastructure. On the topic of Venezuela, the country has been in social and economic turmoil since President Maduro took power a few months ago. What we're going to be watching there is a state owned oil company PDVSA is at risk of defaulting on its debt obligations. And so it's a situation we are monitoring as we get into 2018.

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Oil price expectations

So where we see oil prices going in 2018 is more or less around the same range of $55 to $60. We have been working with a range of $40 to $45 in the low end and $55 to $60 on the high end. We still think oil prices trade within that range but probably toward the upper end of that range given the OPEC production cuts that we just witnessed. In terms of three key things that we're looking for as we get into 2018. One is the compliance of the OPEC members. Countries have been known to cheat, so we want to monitor their initiatives and adhering to the deal. The second big thing is U.S. oil production. U.S. oil companies are currently in the budgeting phase today. So we're going to see what kind of spending patterns that they'll show into 2018 as they grow their production bases. The third thing that we're monitoring is ongoing geopolitical situations around the world specifically the conflict between Kurdistan and that Iraqi government as well as ongoing conflict with the Trump administration and Iran and an ongoing civil violence in Nigeria in Libya as well.  

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Canada's oil market

So for 2018 what this means for Canada is, it's all going to be about pipeline takeaway capacity. As Canada ramps up its crude oil volumes, there is a lack of pipeline takeaway capacity and this is coming to fruition in 2018. Now what this means is that producers will have to look for alternative forms of transportation to get their crude to market. This means utilizing crude by rail to ship oil to markets such as the Midwest and Gulf Coast in the U.S. Now this is going to be a phenomenon that is going to continue to occur until new pipeline capacity is available in Canada. But we don't foresee that until toward the end of the decade. Until then producers will have to utilize rail to ship their crude to end markets.

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