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Brian See, portfolio manager, CIBC Asset Management.
So, when we look at the supply and demand outlook for oil, the situation continues to be very volatile and uncertain. On the supply side of things, the supply situation is actually somewhat constructive. When the OPEC-Plus convened [in the] middle of 2019 to increase the production cuts, or maintain the production cuts, all the way into Q1 2020, this was constructive because it effectively kept almost half of the world’s supply flat all the way into next year. In addition to which, you had countries such as Venezuela and Iran continue to decline, and so, from a supply standpoint, it was actually fairly positive.
The only growth that you saw coming in was the U.S. shale growth at about a million barrels a day, and then, when you look at that into next year, while U.S. shale is expected to continue to grow, there is some incremental growth also coming out of Norway and Brazil. And that, in a cumulative amount, amounts to about one-and-a-half million barrels a day, according to our estimates.
When you look on the opposite side and look at demand, this is where the uncertainty comes for oil. A lot of the demand or uncertainty is being driven by the U.S.-China trade war. And so, what we’ve seen is demand figures continuously being revised down to a point where we think demand is expected to grow about a million barrels a day in 2020.
And so, why this is important is because oil demand is effectively made up of only a few countries: China, India, and several emerging market Asian countries, and this constitutes for that one million barrels a day of demand. And so, with that uncertainty and the ongoing trade war, this effectively puts uncertainty on a lot of those demand figures as we go into 2020. Now, when we look at the supply and demand and combine it all together, the 1.5 million barrels a day of supply and the one million barrels a day of demand, this equates to an oversupply of about 0.5 million barrels a day into 2020.
Now, this production needs to be solved in order for the oil markets to be constructive and supportive. So, one of the things we’re looking for is for OPEC to potentially step back into markets by reducing their exports to the global market or potentially even instituting further production cuts in order to further balance and support oil prices. In addition to which, there’s also other moving factors, such as any resolution on the U.S.-China trade war could support and increase demand figures, as well as other supply factors, such as U.S. shale could potentially shrink as well as producers there in the U.S. commit to more moderated levels of growth and instead focus on return of capital to shareholders, either through buybacks, dividends, or debt reduction.
And in addition to which, you still have ongoing geopolitical tensions in the world. So, as you can see, a lot of moving parts here that still contribute to the uncertainty in the oil outlook.
As we go into managing this uncertainty in our portfolios, what does this all mean in terms of running an energy fund? Well, I think we’re looking at two parts here to the equation, one of which is that energy equities are at their cheapest valuations since 2015 when oil prices collapsed. And so, we’re seeing extremely attractive multiples and NAV valuations on a lot of energy equities, and we think it’s a good time to pick up high-quality stocks at discounted prices, which are printing significant amounts of free cash flow. Two of which we recommend in our portfolios are Suncor Energy and Cenovus Energy.
On the other hand, because of that uncertainty on demand due to the trade war, we’re also marrying that with more defensive investments in pipelines and utilities, and this helps offset some of those cyclical investments. And we think this is just the most prudent way to manage an energy fund through an uncertain and volatile environment as we invest through the cycle.