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Brian See, portfolio manager, CIBC Asset Management.

Oil prices are going to continue to be volatile for the foreseeable future as we get into 2019 here. Oil’s obviously a very large component on the Toronto stock exchange, making about 20% of the TSX. What we saw last year for oil markets is that oil prices grinded up to over $75 a barrel WTI in early Q4 ’18 only to fall to about $45 a barrel just a couple months later. Since that time, prices have rebounded to about $50 to $55 a barrel. So to say the least, oil has been on a volatile ride. We think this actually continues for 2019.

When we look at 2019, we decompose it into supply and demand. On the supply side, it actually looks quite constructive. Number one, OPEC had a meeting last December of 2018 in terms of mandating a production cut of 1.2 million barrels a day. Those production cuts are effective January 1st of 2019, so that’s going to help to keep supply off the market and help draw down oil inventories and actually deconstructive of prices.

Point number two is actually geopolitical: the ongoing situation in Venezuela, which continues to experience social and economic chaos, and has been since President Maduro took over the country. Now, 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 with this number is that 500,000 barrels a day goes into the US, and elsewhere as well. So most recently, the US had put economic sanctions onto Venezuela, thereby potentially limiting that production to get to market. So, this is no different than the economic sanctions the United States placed on Iran as well. Therefore this actually limits supply, and again, and it’s actually somewhat supportive there.

Then the third, final thing is just with US shale production. What we’re seeing right now from the US shale producers is that we’re in budgeting season. They’re coming out with budgets more reminiscent of a $50 to $55 oil environment. Now this is different because last year these budgets were done in probably a $60 to $65 oil environment. So their key point here is that with lower oil prices comes lower capital spending, hence a lower recount number, which will ultimately lead to less oil production and growth out of the US. The US is still growing, but at least it’ll be growing at a slower pace now, given the oil prices that we’re seeing today.

I think for all those reasons from a supply side, it actually looks constructive. If we’re to shift to the demand side, that is the ultimate wild card here. Global GDP growth continues to decelerate around the world, whether it’s emerging markets, such as China and India. They’re continuing to slow down. So, that’s gonna be an impact for oil. Oil is expected to grow around 1.2 to 1.4 million barrels a day in 2019, but there is risk of that number going on the lower end of that growth forecast range, just because of the impending slow down in global growth worldwide. So what we’re looking for is just to see if end products, such as gasoline and distillates, are gonna be consumed by the end consumer to ensure that demand is still supportive. So, that’s something that we’re gonna have to track to see if gasoline inventories or diesel inventory is gonna come down, which are currently at somewhat elevated levels.

We would put the supply and demand factors together. What this equates to is effectively quite a volatile oil environment for the broader part of 2019. While there’s still some constructive points there in supply, demand still remains a wild card, so oil prices are still gonna be fluctuating. The way we think about it is a $50 to $60 WTI range, I think is a reasonable range to work with given the information that we have at this time.

CIBC Energy Fund
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