After a tumultuous end to 2018, investors hoping oil volatility would subside this year may be in for an unpleasant surprise.
Oil prices “grinded up” to over US$75 a barrel for West Texas Intermediate (WTI) early in the fourth quarter, only to fall below US$45 a barrel a couple months later, said Brian See, vice-president and portfolio manager at CIBC Asset Management in a Feb. 7 interview. Since then, prices have rebounded to about US$50 to US$55 a barrel.
“Oil has been on a volatile ride, and we think this continues for 2019,” said See, who manages the CIBC Energy Fund.
WTI opened at US$52.66 on Feb. 13, while Brent crude opened at US$62.11. See said he expects WTI to range from US$50 to US$60 per barrel this year.
Despite positive fundamentals on the supply side, See said demand will continue to be a “wildcard.” This will cause prices to fluctuate and, as a result, lead to volatility in the Canadian stock market since oil stocks make up about 20% of the TSX.
Three factors point to less production, which could help improve pricing, according to See.
The Organization of the Petroleum Exporting Countries (OPEC) and its allies decided at their December meeting to cut oil production by 1.2 million barrels a day. Cuts are effective as of January this year.
“That’s going to help to keep supply off the market, help draw down oil inventories, and be constructive for prices,” said See.
The political situation in Venezuela continues to cause “social and economic chaos,” said See.
“Venezuela is important because it is an oil exporter. But they’ve seen volumes fall from approximately 2.4 million barrels a day at its peak, all the way down to just above a million barrels a day. What’s important about this number is that 500,000 barrels go into the U.S. and elsewhere.”
Last month, the U.S. imposed sanctions on Venezuela’s state-owned oil company, Petroleos de Venezuela, or PDVSA, which will limit the country’s exports.
“This limits supply again, and is somewhat supportive [of pricing],” said See.
U.S. shale production
The third constructive point on the supply side is that U.S. shale producers are limiting spending.
“U.S. shale producers [are] in budgeting season,” said See. “They’re coming out with budgets more reminiscent of a US$50-to-US$55 oil environment. Last year, these budgets were done in a US$60-to-US$65 oil environment. The key point here is that with lower oil prices comes lower capital spending, hence a lower rig count number, which will ultimately lead to less oil production growth out of the U.S.”
Oil production is expected to grow from 1.2 million to 1.4 million barrels a day by year-end 2019, See said. However, decelerating global GDP growth, which the IMF forecast at 3.5% in 2019, will impact oil demand, he said.
“There’s [a] risk of [oil production] going on the lower end of the growth forecast range because of the impending slowdown in global growth worldwide,” he said.
The key is to pay attention to how products, such as gasoline and diesel, are being consumed by the end consumer, he said. If demand is still supportive, it should help keep pricing relatively stable.
“When we put supply-and-demand factors together, what this equates to is quite a volatile environment for oil for the broader part of 2019,” said See.
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