Anxious about oil? Monitor these 3 trends

As you examine the oil market this year, there are three things you should be watching closely, says Scott Vali, formerly vice-president of equity for CIBC Asset Management.

These are:

1. Supply metrics. Currently, we’re seeing supply coming off the market in North America, says Vali. “So we’re looking at the E&P [exploration and production] companies as they report earnings to see what kind of capital expenditure reductions they’re going to be leading with, and what that means for supply growth.”

Read: Bulls, bears and contango: what’s in store for crude?

So far, out of the few that have reported, he adds, “Capital expenditure reductions are still in the 35% to 60% range, and we’re seeing signs of additional supply growth slowdown. Year-over-year growth was basically flat toward the end of 2015 in North America. We expect to see that continue to decline to the point where we’re expecting a 500,000- to 600,000-barrel-per-day drop, year-over-year, as we exit 2016.”

2. Demand growth. Monitor what’s happening on the demand side, says Vali, because “demand in 2015 was actually quite strong. We saw demand for gasoline grow in China, up 12% year-over-year, and strong demand in North America, up about 3.6% year-over-year. That’s the first growth we’ve seen of that size in 25 years.” Read: $55 oil could happen as early as next year

What’s interesting, he explains, is people are driving more, with vehicle miles driven increasing dramatically. And, “We’re starting to see fuel efficiency actually decline as customers buy larger cars such as SUVs. That’s all with respect to the decline in the price of gas, which is incentivizing different driving habits than we’ve seen in the last few years.”

3. OPEC developments. Vali is also interested in what OPEC does this year. “In particular, Iran has talked about bringing anywhere between 500,000 to 1 million barrels per day back into the market. We think it will be at the lower end of that range, just given some of the challenges they’ve had over the last few years in maintaining their production profile. But we also want to watch that closely.”

Looking at the overall picture, he expects continued decline in global oil supply in 2016. “Demand will continue to improve, [while] a lot of the oversupply in the market is going to balance itself.”

And, even though markets have been concerned about storage levels, Vali’s not worried. “Storage is relatively large in total volume terms, but if you look at it on a days-of-use basis, it’s really not that onerous. As we see supply decline and as the market starts to balance as we move into 2017, that storage volume won’t be as onerous a cap on the market as what we’ve seen in the past.”

Read: Don’t let a good oil crisis go to waste

The energy market is on track to improve by the end of the year, he adds, because “current crude prices are unsustainable and most companies aren’t earning a return. We think prices will start to move back up toward $40 to $45, and even higher, as we move into 2017.”

Read:

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