Commodities_Oil_Casing

Oil prices fell again after a report showing U.S. oil inventories rose 14.3 million barrels last week — far more than the estimated 3.1 million barrels.

But Tim Simard, head and managing director of commodity derivatives at National Bank of Canada, isn’t too worried.

“In the near-term, there is risk of lower prices,” he said during a Horizons ETFs webinar today. “The world is in an oversupply situation of 2 million barrels a day. In certain regions, we’re dangerously close to running out of excess storage capacity, which could also move the market to new lows.”
But in the longer term, “we should see a material increase in demand over the second half of 2015, relative to the first half of 2015,” by an average 1.8 million barrels a day.

Read: Will oil prices keep plummeting?

Simard says this increase won’t be due solely to lower prices. “This is a seasonally normal pattern in the oil markets. We saw this in the second half of 2014, when demand was 1.9 million barrels above the first half of the year.”

On the supply side, oil production should fall as companies reduce capital expenditures in the face of lower prices. And, Simard says the U.S. oil rig count has collapsed 34% in the past four months, adding it’ll take between six and nine months for that change to make a material dent in U.S. production growth rates.

“These factors will move us to a better balance between supply and demand” in the latter half of 2015, he says.

Read: How shipping costs affect global oil prices

The market seems to agree. The December 2015 WTI forward contract is hovering near $60 a barrel, and Simard suggests investors consider exposure to deferred contracts instead of spot contracts. “I think we may have seen the lows for the 12-month deferred price,” he says. “The worse spot prices are in the short-term, the better things are for prices in 12-to-18-month timeframe.”

This was borne out in 2008.

What’s more, “the cure for low oil prices is low oil prices,” he says. A $20/barrel price, as predicted by Citi, would “accelerate any incremental demand, and hasten a potential decline in the rate of non-OPEC supply growth.”

ETF or equities?

It may be better to buy oil futures or oil-futures ETFs than equities, says Simard.

“Equities may suffer from short-term weakness, whereas an ETF that’s further on the forward curve may insulate you,” he says.

Read: Canada’s winners and losers as oil prices drop

More importantly, though, “The futures play is a pure play on the underlying crude oil price,” whereas with equities, “there are a lot of exogenous variables that won’t be entirely tied to the commodity price. You might find a company that also has natural gas production, and a pure oil play will be diluted.”

In fact, he adds, the correlation between a given oil stock and the rise in WTI prices is usually no more than 60%.

Originally published on Advisor.ca

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