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Brian See, Portfolio Manager, CIBC Asset Management.

When we came into the beginning of 2020 things looked somewhat optimistic, particularly as the OPEC cuts continued to take hold. But unfortunately, the coronavirus has put a damper on oil demand.

Now why that’s important is because global oil demand heading into 2020 was about a billion barrels a day and about 50% of that was coming from China. So, with the coronavirus here, that’s impacted everything from transportation, obviously with airplanes, trains and just overall usage of oil, and that has fallen significantly. That’s going to continue to impact demand, at least for the time being.

In terms of timing, it’s still going to be difficult as the countries around the world, along with the World Health Organization, seek to, I guess, curtail and prevent the virus from spreading. So, we see this as something to continue to monitor as we go through the broader part of 2020 in terms of oil demand.

On the supply side, it’s actually looking somewhat more constructive in the second half of 2020. We entered this year, first half of 2020, with several supply projects coming on, namely from Norway, Brazil and Guyana. That’s going to be finished by mid-year and then in the back half of the year, U.S. Shell also continues to — well, it’s still growing — is actually slowing now given the lower commodity prices here in the $50 range.

I think that’s also setting up to be a constructive thing on the supply side. As we get further into the year, specifically into March, OPEC is going to be hosting another OPEC meeting here. From the latest discussions, the OPEC technical meeting, or joint committee, had recommended to maintain the production cuts all the way through 2020. If that’s the case, then that sets up for also a fairly constructive backdrop, at least from the supply side as we get through the remainder of the year.
All in all, it’s still going to be a factor of maintaining this coronavirus and the impact and demand, just given how much China makes up of it. So we’ll continue to monitor the situation as we go forward into 2020.

In terms of impact to Canadian oil producers, we actually see the impact is fairly positive for Canadian oil producers. Namely, if the OPEC cuts continuing into 2020 this elevates global heavy oil prices. With elevated global heavy oil prices, this also elevates WCS prices, which is a big beneficiary to Canadian oil producers. So that allows the Canadian oil producers to realize higher pricing. So companies such as a Suncor, Cenovus, Canadian Natural Resources, and even MEG, they all benefit from that. We think that’s also a positive in terms of keeping the heavy prices higher.

Now, the other things that the Canadian producers are facing… There’s a pipeline in egress capacity, which is still an ongoing issue in terms of getting oil out of the basin, but things are happening. Capacity advancements in terms of crude by rail is happening as we speak and so that is moving crude out of the basin. We’ve seen that in terms of the light heavy differentials coming in into the teens type range and so that’s positive for the producers as well.

In addition to which, we’ve had positive advancements at least on the regulatory side, on TMX, Line 3 and even Keystone to an extent. While these pipelines are still needed and the progress is still slow, any amount of progress is actually a positive. In addition to which, the Alberta government still maintains some production cuts to help mitigate that ongoing supply from overwhelming the market.

I think overall, the Canadian producers are actually set up fine, company specific wise. If we look at their operational aspects, these companies are actually producing double digit free cashflow yields, even in today’s commodity prices, which is in the 50ish dollar range. We think that’s actually quite positive in relation to global peers, which are not at those free cashflow levels. The Canadian producers also have pretty strong balance sheets and with a low decline rate on their production profiles, it actually sets itself up quite nicely into the back half of 2020.

CIBC Energy Fund
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