Transcript: What’s fuelling oil volatility?

Runtime: 2:55

Brian See
Portfolio Manager
Global Equities, CIBC Asset Management

Oil continues to be an extremely volatile commodity, both from a supply and demand standpoint. The supply outlook is actually somewhat constructive. We had OPEC plus continue with their production cuts from the middle of 2019 all the way into 2020.

[Onscreen Text: OPEC plans to continue production cuts into 2020]

So that effectively keeps us off forty five percent of global supply flat into next year. We also have more moderated U.S. shale growth…

[An oil derrick surrounded by rocks]

…and with some growth coming from Norway and Brazil.

[An offshore oil rig in Norway, followed by an image of a Brazilian shoreline]

And so, what this all means is it equates to about one and a half million barrels a day of supply growth into next year, 2020.

[Onscreen Text: Expect supply growth of 1.5 million barrels a day into 2020]

[Title Reads: Demand side for oil]

Uncertainty on oil really comes from oil demand, and that's all stemming from the US China trade war that continues to impede overall GDP growth and hence oil demand.

[Onscreen Text: Uncertain oil demand due to U.S/China trade war]

Why that's important is oil demand is really made up of China, India and emerging market countries in Asia.

[A large government building in China is followed by a time-lapse of a busy street in India, which is followed by a helicopter view of a city in Vietnam]

[Onscreen Text: Expect ongoing oil demand of 1 million barrels a day]

And so, with a trade war continuing to impact demand, we expect demand to be about a million barrels a day going into next year into 2020.

[The entrance gate to the Forbidden City in Beijing, followed by the Whitehouse at night]

So, when we kind of combine that all together, the supply of one and a half million barrels in demand of 1 million barrels, we get a surplus of zero point five million barrels a day into next year.

[Onscreen Text: This means a surplus of 0.5 million barrels a day into 2020]

And this is where we have to look at what OPEC is going to do to further balance the market. They could potentially come back and balance the market by eliminating exports to the world, or potentially further instituting production cuts to further prop up and support oil prices.

[The exterior of the Organization of the Petroleum Exporting Counties (OPEC) office in Vienna, followed by oil tankers at sea, and then a shot of a man in hard hat looking at an oil derrick at sunset]

Other moving factors that we're watching is obviously the ongoing situations in Venezuela and Iran on the supply front…

[A bridge filled with a long line people leaving Venezuela, followed by an image of an Iranian Oil Tanker at sea, then a time-lapse of an oil well in the USA]

…but as well as what U.S. shale companies will do. They're going into a budgeting season later this year into 2019. And so we want to see what growth is going to come out of the U.S.

[The Whitehouse lawn]

At this point, we think that growth is somewhat moderating just because investors have demanded further returns of capital to shareholders, i.e., through dividends, share buybacks or debt reduction. So to wrap it all up, I think we still think oil prices are in that 50 to 60 range going forward, but expect volatility to continue just as it has been for the last few years.

[Onscreen Text: Expect oil to trade in range of US$50-60 a barrel. Expect volatility to continue into 2020]

[Title Reads: Investment Opportunities]

How we're managing or seeing opportunities within the energy sector is twofold. One of which is energy equities have sold off tremendously.

[An offshore oil rig glimmering in the sunlight]

In fact, they're at their cheapest level since 2015 when oil prices fell during that year. So, it's an opportunity to pick up very high-quality companies at attractive valuations that are also printing double digit free cash flow levels.

[Onscreen Text: Overall, oil equities are at lowest valuations since around 2015]

On the other side of the spectrum, we've also married that with more defensive energy stocks within the portfolios and this involves pipeline companies and utilities.

[A long stretch of oil pipelines in a barren landscape.]

We think that's a good offset to the impending volatility on the demand side of things.

[Onscreen Text: Defensive energy stocks like pipelines and utilities may offset impending volatility]

And it helps us navigate through the entire commodity cycle as we continue to invest through some quite volatile times.

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