Citing a wide array of data sources as well as 80’s pop songs, CIBC Managing Director and Chief Economist Avery Shenfeld made a strong case for a new normal of lower energy prices, slower economic growth, and lower interest rates emerging after the Great Recession.

Shenfeld was a featured speaker at the 2016 EnerCom conference in Denver. Here is an abbreviated version of his key points.

The macro picture

Comparing growth trends in per capita GDP from Japan and South Korea with China’s history, we should expect more muted economic growth from China and other emerging market countries than what we saw before the recession.

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What does this mean for the U.S? Not much, as we are relatively well shielded from the emerging markets slowdown. On the other hand, emerging market GDP has a massive effect on commodity demand and by extension, prices.

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Still, there remains significant upside from both China and India: both countries’ oil usages remain well below the OECD average as they continue to lean heavily on fossil fuels in their energy mix. This bodes well for demand going forward, Shenfeld believes.

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Meanwhile, easing monetary policy in the form of lower interest rates from Asian central banks will provide support.

Where will supply and demand meet?

Although there has been significant progress towards supply and demand balancing, excess inventories are still a major hitch in the equation and are expected to meet 2017 projected demand growth.

Looking at the supply curve, a large amount of production becomes economic just south of $60 oil, with production doubling in this range. CIBC predicts global oil demand in 2018 at roughly 100 MM bbl/d, which would put oil prices in the $60 range, would be sufficient to support North American shale producers.

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On the gas side, although $2 gas prices have stalled U.S. output, a decade of predicted demand can be met from the production resulting from $3. Narrowing LNG differentials worldwide have limited its potential as a relief valve for oversupply.

The new plateau: sub-$60 oil, sub-$3 natgas

The conclusion? Shenfeld says to expect sub-$60 oil and $2-$3 natural gas for several years going forward, due to strong inventory levels keeping downward pressure on prices.


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