To develop an outlook for oil, astute investors assess the various factors that weigh on the commodity’s supply and demand. That’s a challenge this year because a previously unknown factor makes oil’s outlook more difficult to assess than usual.
“The coronavirus has put a damper on oil demand,” as transportation in China halts and that country’s overall oil usage drops, said Brian See, a portfolio manager at CIBC Asset Management. “That’s going to continue to impact demand — at least for the time being.”
The impact could be significant. “Global oil demand heading into 2020 was about a billion barrels a day, and about 50% of that was coming from China,” said See, who manages the CIBC Energy Fund, in an interview last week.
See said his team would continue to monitor the virus’s spread and assess its effects on oil.
On the other side of the equation, supply looks constructive, he said, particularly for the year’s second half.
“We entered the first half of 2020 with several supply projects coming on, namely from Norway, Brazil and Guyana,” See said. “That’s going to be finished by mid-year.”
Further, an upcoming meeting on March 5 of the Organization of the Petroleum Exporting Countries (OPEC) is expected to result in sustained production cuts through 2020. “If that’s the case, that sets up [oil] for a fairly constructive backdrop, at least from the supply side, as we get through the remainder of the year,” See said.
In a report published in mid-February, TD Economics said that if OPEC cuts an additional 600,000 barrels per day at that meeting, as recommended by the OPEC+ joint technical committee, global oil benchmarks would likely stabilize in the US$50–$55 range in the near term, before gradually recovering to US$59 by year-end.
Regardless of supply, See said the coronavirus remains the wild card in his outlook.
“It’s still going to be a factor of maintaining this coronavirus and its impact on demand,” he said. “We’ll continue to monitor the situation.”
In a report published last week, Scotiabank Economics estimated that the coronavirus could result in a decline of 8 percentage points in the price of West Texas Intermediate (WTI) in the first quarter of 2020. “This could affect countries outside the Asia-Pacific region that are net oil exporters such as Canada,” it said, adding that if the outbreak is contained by April, the shock to oil prices will likely reverse.
Factors affecting Canadian oil
Despite the coronavirus, See’s outlook for Canadian oil included some positive factors.
For example, OPEC cuts would raise global heavy oil prices, including the price of Western Canada Select. “Companies such as a Suncor, Cenovus, Canadian Natural Resources and even MEG — they all benefit from that,” See said. He also noted that Alberta’s production limits help keep supply in check.
An ongoing Canadian oil issue, however, is pipeline capacity. See noted that crude-by-rail volumes increased at the beginning of the year. While those volumes are likely responsible for recent heavy oil price gains, further gains may be undermined by nationwide rail disruptions due to protests over the Coastal Gas Link LNG pipeline, said the Scotiabank report.
While Canada’s progress on pipeline infrastructure is slow, “any amount is a positive,” See said, noting that the Trans Mountain, Line 3 and Keystone pipelines recently cleared regulatory hurdles.
He also lauded Canadian oil producers’ operations. “These companies are producing double-digit free cash-flow yields, even at today’s commodity prices,” he said. The price for WTI is about $50.
And he described Canadian producers’ balance sheets as strong. That metric, combined with low decline rates, means Canadian oil “sets itself up quite nicely into the back half of 2020,” See said.
This article is part of the AdvisorToGo program, powered by CIBC. It was written without input from the sponsor.