Oil Price Watch - Opportunities and Risks
Vice President, Equities, CIBC Asset Management
“At the most recent OPEC meeting, the OPEC nations agreed to 100% compliance of its original late 2016 cuts of 1.8 million barrels a day. In addition to which, they've also agreed to bring on a nominal production supply increase of about a million barrels a day. So in terms of compliance, what had been happening is compliance levels had actually reached 150%. So the 1.8 million barrels had actually increased to 2.7 million barrels a day. And this was due to falling supply in Venezuela, and so that had been larger than expected, as well as other nations had a lack of reinvestment in their oil fields. Ultimately this led to, basically, oil inventories falling from their historical levels to five year averages, consumer demand increasing in terms of usage of gasoline and distillates, and ultimately oil prices rallying from the lows of 30 dollars all the way up to 75, 80 in the last year and a half. Now ultimately this was all positive, but it came to a point where higher prices ultimately led to demand destruction.”
Expected supply increase
“So if we look at actually the production increase of a million barrels a day, this was actually necessary to balance the markets. Now expectations had reached about 600 to 700,000 barrels a day. And this was mainly due to the fact that spare capacity was limited in a lot of nations. So this really left only bigger nations such as Saudi and Russia and Kuwait to actually bring on that spare capacity. So net-net the expectation of 600,000 to 700,000 was a lot less than the million barrels that are proposed to bring onto the market. Now while this is higher overall we still think it's actually a positive for oil markets in the long term because, for one, it adheres to the original production cuts agreed upon in late 2016 and ultimately balances the market for the long term.”
Issues affecting oil prices
“So the key issues to be watching for oil prices are a lot of the geopolitical issues. So for one, the Iranian nuclear deal which the U.S. has been adamant about exiting. Now ultimately this will lead to pressure from European nations to exit the deal. And so what we'll be watching there is, which OPEC nations pick up that slack from falling Iranian volumes. Other areas to watch for are Libya and Nigeria. These two are political hotspots for rebel attacks. And so oil could go offline easily in these countries too, causing spikes in oil prices. Another nation to be looking at, that doesn't receive as much attention, is Mexico. The country has seen declining oil production and with the country going through an election, it's going to be interesting to see if they can reverse course on oil production or if volumes continue to fall in that country. And I would say the final thing is the 800 pound gorilla in the room, which is U.S. shale production. The U.S. is at 10 million barrels of oil today and continues to grow. Now there's pipeline constraints coming out of the U.S., specifically in the Permian Basin and Cushing, but we think these will be alleviated in the second half of 2019. And ultimately production continues to grow in the U.S..”
Impact on investors
“So overall we think this OPEC deal is a positive because it keeps the production cuts for the broader part of 2018 and keeps the oil market in balance. Ultimately what this means for investors and oil prices in general, is that we still think oil prices will trade in range of 60 to 70 going forward. It's still a healthy enough range for the industry to execute their business plans and deliver competitive rates of return. In terms of our portfolio positioning we continue to favor E&P companies over other energy subsectors. The reason being is these companies continue to offer growth and good rates of return for investors globally. In addition to which the E&Ps continue to do shareholder friendly initiatives such as debt reduction, share buybacks and dividend increases and for all these reasons we think that that leads to outperformance over the other energy subsectors. Net-net overall we still think energy is still a positive place to invest. Valuations look attractive especially post this OPEC deal.”
Canadian Imperial Bank of Commerce Website - Copyright © CIBC.
DoubleLine® is a registered trademark of DoubleLine Capital LP.
Copyright 2018 CIBC Asset Management Inc. It is for informational purposes only and is not intended to convey investment, legal, or tax advice.
The material and/or its contents may not be reproduced without the express written consent of CIBC Asset Management.
Renaissance Investments, Renaissance Private Investment Program and the Axiom Portfolios are offered by CIBC Asset Management Inc.
™Renaissance Private Investment Program and ™Renaissance Private Pools are trademarks of CIBC Asset Management Inc.
®Renaissance Investments, Axiom and Axiom Portfolios are registered trademarks of CIBC Asset Management Inc.