How trade tensions are affecting oil stocks

As trade policy makes for more volatile equity and bond markets, oil analysts are trying to anticipate what the ongoing tensions mean for energy demand.

Brian See, portfolio manager at CIBC Asset Management, says the U.S.-China trade war “effectively puts uncertainty on a lot of those demand figures as we go into 2020.”

Oil demand comes primarily from China, India and other emerging Asian economies, See said in an Aug. 15 interview. Despite the trade uncertainty, he’s forecasting demand to grow by about one million barrels per day in 2020.

Supply is expected to grow even faster, though, despite the fact that the Organization of Petroleum Exporting Countries (OPEC) decided earlier this year to maintain production cuts into the first quarter of 2020.

“This was constructive because it effectively kept almost half of the world’s supply flat all the way into next year,” said See, who manages the CIBC Energy Fund. “In addition to which, you had countries such as Venezuela and Iran continue to decline. From a supply standpoint, it was actually fairly positive.”

Looking ahead to 2020, See said production growth from U.S. shale producers, as well as from Norway and Brazil, will amount to estimated growth of 1.5 million barrels per day.

“This equates to an oversupply of about 0.5 million barrels a day into 2020,” he said.

“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.”

Those issues could be addressed at the organization’s meeting later this year.

There are still a lot of moving parts, though, when it comes to supply and demand. A resolution between the U.S. and China could increase demand, See said, while U.S. shale production could shrink as producers commit to more moderate growth “and instead focus on return of capital to shareholders, either through buybacks, dividends or debt reduction.”

One outcome of this uncertainty is that energy equities are at their cheapest valuations since 2015 when oil prices collapsed, See said.

“We’re seeing extremely attractive multiples and [net asset value] NAV valuations on a lot of energy equities,” he said.

“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 names See recommended are Suncor Energy and Cenovus Energy.

Suncor’s stock has dipped below $38 in recent weeks after rising above $46 in March. Cenovus started the year trading under $10. The stock briefly rose above $14 in April, but was trading around $11 this week.

On the other hand, See said he’s also looking for safer investments.

“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,” he said.

“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.”

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