Where Are Canadian Oil Prices Headed in 2019?

Transcript: Where Are Canadian Oil Prices Headed in 2019?

Length: 3:54

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Brian See
Portfolio Manager, Global Equities, CIBC Asset Management

Oil prices continue to trade in the range that we have expected. WTI prices are hovering at between US$60 and US$70 and then Brent prices between $70 and $80. We still continue to think that these are the ranges that oil prices will trade in for the foreseeable future. There are things that are evolving here in the oil markets, one of which is the impending supply coming off in Iran as well as Venezuela. The U.S. is softening their stance on curtailing back Iranian volumes, which is basically pushing oil prices down at the moment. So these are ongoing dynamics. We've also had conflict in the Middle East as well between Saudi and the U.S. and a variety of countries as well. So that's offsetting some of the bearishness on the oil price. Globally, a lot of companies continue to grow oil production and that's still going to be on an ongoing basis - something that we're going to look out for.

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Oil differentials

When we look at the oil differential, if you look today in the market, it's close to US50 dollars a barrel and that is the widest levels that we've seen. And the reason for this is because there's a lack of takeaway capacity. The Canadian oil industry has grown their production to the extent that the pipelines cannot take any more oil. And so when you don't have that takeaway capacity prices are discounted, hence that differential gets wider and wider. As we go forward and look at that differential situation, we actually think it's going to improve. The bulk of our oil is being sent to the United States in the Midwest region where a bulk of the refineries are. Those refineries have been offline. But they are about to come out of turnaround. So we expect about a million barrels a day of refining capacity that's going to come back online. And so that's incremental demand that's going to help differentials. The second thing that the industry is doing is crude by rail shipments. That is increasing as we speak, a lot of oil producers are seeking out rail deals to transport their oil because they can't get it through pipeline. And so that's going to help alleviate the differential situation as well. And then I would say that the final thing that would help the differential situation is low prices often cure low prices. It's so low right now that the oil industry is shutting in some of their production. So we estimate approximately about 100,000 barrels a day of heavy oil production would be shut in by year end. And so by taking that supply off the market it will help to rebalance the differentials.

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Impact on Canadian oil companies

If we take a look at a 50 dollar differential and compare it to historical differentials which are 15 dollars, that difference, which is 35 dollars a barrel, that economic rent is transferred to the U.S. refiners or marketers and they're the beneficiary of low Canadian oil prices. So that is what's happening right now. We've seen it from the reporting of U.S. refiners and big integrateds benefiting from cheap Canadian product. What's ultimately going to fix this is again takeaway capacity via a combination of crude by rail, shut ins from Canadian producers, or additional pipeline capacity. Ultimately we see long haul pipe takeaway capacity as the ultimate solution for Canadian oil producers, but that won't come until 2021 which we expect as the TransCanada Keystone XL project. And later which is the Trans Mountain expansion project.

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Opportunity for investors?

With the oil differentials that we're at right now it's actually an opportunity to step into and buy a lot of these heavy oil producers. The reason being is with the crude by rail shipments coming up, the shut ins coming in ,the one thing that's also happening is that Enbridge's Line 3 is going to come on by the end of 2019, so that's actually additional pipeline capacity. All those reasons are going to help alleviate the differential and so we see attractive investments in companies such as Cenovus and Canadian Natural Resources that are trading at actually quite attractive valuations due to the ongoing differential issue which we think will improve. The second thing I would say that's an opportunity is the Permian Basin is another one, an area that we're seeing good attractive investments. And so for that area we favour companies like Concho Resources and Pioneer Resources.