Oil – More Volatility Coming

Length 3:20

GFX
Brian See, Portfolio Manager, Global Equities, CIBC Asset Management

"So, oil has been quite a volatile commodity, to say the least. I mean, if you look at last year in 2018, you saw prices growing all the way up to 75 dollars a barrel in early Q4 only to fall to sub 45 dollars a barrel just a few months later. And now the prices have recovered back up to about 50-55 dollars a barrel. So it's been a volatile ride. And how we see 2019 unfolding is, expect some more volatility because there are a lot of factors driving the oil price.”

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Oil supply factors

“Number one is the OPEC cuts. You'll recall last year OPEC hosted a meeting, implemented a 1.2 million barrel a day production cut. And those cuts are effective January 1st of this year. So what that's going to do is to obviously take off supply from the market but as well as drain oil inventories and help keep the oil markets in balance. So we're going to be watching that as the year unfolds. The second big thing in the oil market is the Venezuela situation. The country is effectively in social and economic chaos and has been since President Maduro took over the country and oil production has continuously fallen in Venezuela to the point where oil production is down to just over a million barrels a day. And that's off of a peak of 2.4 million barrels. Now why that's important is a lot of that oil is being exported to nations such as the United States and most recently the U.S. administration has put in economic sanctions against Venezuela. This is no different than the sanctions that the U.S. had placed on Iran as well. And so what this means is it keeps the Venezuelan barrels from potentially getting onto the market and hence takes off more supply in its constructive for oil prices. And I would say that the final thing is U.S. shale producers. The U.S. continues to grow oil and we're at a point right now where it's the US budgeting season. And the key there is that all these producers are going to be coming out with budgets to grow now in a 50 to 55 dollar oil environment and this is a lot different than their previous budgets which were done last year in more of a 60 to 65 dollar oil environment. And so with weaker oil prices comes less capital spending and hence less oil production. And I think for all those three reasons the supply side is actually quite constructive for oil.”

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Oil demand factors

“Demand is effectively a wild card. Global GDP growth is a big driver of oil demand and what we've seen is global GDP start to decelerate around the world. In fact the latest IMF study showed that GDP growth in 2019 was down to 3.5 percent. And this has been an ongoing thing where there has been weakness in GDP demand. Oil demand is obviously part of that and it's still expected to grow 1.4 million barrels a day. But that's actually, there's concerns of that number at risk or potentially going on the lower end of that guidance range. What we're going to be tracking as we go through 2019 is to see if the end products are being consumed i.e. that's the distillate or diesel or gasoline. And so we need to see those inventory levels come down to ensure that demand is still going. So that's something that we're going to be tracking as we go forward through 2019.”

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2019 Outlook

“When we combine the supply and demand factors that we see we think oil trades in a range of about 50 to 60 dollars for the better part of 2019. Now obviously a lot of things are still moving around but we think this is an actual acceptable range in terms of balancing the oil supply and demand markets.”