CIBC’s $2.41 million barrier autocalls on SPDR Oil & Gas may outperform the ETF

By Emma Trincal

New York, Aug. 30 – Canadian Imperial Bank of Commerce’s $2.41 million of market-linked securities due Aug. 27, 2024 – autocallable with contingent downside linked to the performance of the SPDR S&P Oil & Gas Exploration & Production ETF – may outperform on the upside as oil prices, after surging this year, are poised to continue to rise but at a slower pace, sources said.

The notes will be called at par plus an annualized 18.8% call premium if the fund closes at or above its initial level on any annual observation date, according to a 424B2 filing with the Securities and Exchange Commission.

The payout at maturity will be par unless the fund finishes below its 70% downside threshold, in which case the payout will be par plus the return of the fund with full exposure to any losses.

Jerrod Dawson, director of investment research at Quest Capital Management, said the 18.8% annualized call premium could very well beat the fund’s gains based on recent oil price moves.

“Prices can still go up, but I think the upside has already been had,” he said.

Slower recovery

“The economy is still growing but at a slower pace. The Delta variant has put a downward pressure on oil as it has reduced demand for gas.”

Dawson said oil prices have two main drivers – economic growth and geopolitical factors.

On the economic front, some of the advance has been put on hold with the spread of the Delta variant of Covid-19.

“We had a pretty good run. After the pandemic kept demand pretty low, oil prices have recovered with the vaccinations, the reopening and the lifting of travel bans.”

Delta, Middle East

The Delta variant however has reduced demand for travel, causing oil prices to decline since July.

On the geopolitical side, investors need to be aware of what may cause oil to be more volatile.

“The Middle East obviously is crucial. If OPEC increases output, prices will be more contained. Any flareup in the Middle East and prices will go up.

“Because of the political risk, you should show this note only to a client who wants to be in that space, because oil is a pretty unique, volatile asset,” he said.

For the right client

Dawson said he liked the payout because the annualized premium had the potential to be higher than the underlying return.

“Crude oil prices have surged this year, but the momentum may be behind us,” he said.

WTI crude oil futures are up 48% this year. Prices peaked in early July at $75 a barrel. On Monday, WTI fell below $69 a barrel.

“It’s a pretty decent note for the right client,” he said.

“You can get 19% a year even if oil is flat, and you are protected on the downside up to a 30% decline, which is very reasonable.

“You’re not giving up too much. The dividend of the ETF is only 1.18%.”

“It’s a reasonable setup.”

Solid premium

“Can prices rise again? Yes, but I don’t see oil prices rising as quickly as they did earlier this year.

“I’ll take the 19% a year. It’s a pretty robust number.

“You give up liquidity, but you can outperform.

“If the fund is down, you lose nothing as long as it’s not down more than 30%.

“You only get hurt if oil prices go to the moon.

“I think that upside has already been extracted. A spike in oil shouldn’t be your base case.

“I kind of like it.”

Plateauing market

Edward Moya, senior market analyst at multi-asset trading firm Oanda, did not comment on the note. But his outlook on oil was also moderately bullish. If oil prices go up but at a modest pace, noteholders could see the call premium surpass the return of the underlying ETF.

Moya stressed the impact of the spread of Covid-19 as an important factor keeping a lid on oil prices.

“The reopening has taken a hit with the Delta variant. The market is starting to show signs of plateauing,” he said. He pointed to a rising number of airlines planning to cut flights as people cancel bookings.

“We’re still battling Covid so demand may not be as strong as anticipated.”

Crude oil prices could rise temporarily in the aftermath of hurricane Ida, which hit Louisiana on Sunday, forcing the shutdown of refineries, and reducing supply momentarily.

But the move should be short-lived.

“You will see short-term price spikes, but the longer-trend is going to be more subdued,” he said.

Concerted effort

Another factor putting some pressure on oil prices comes from exporting countries seeking to support a global economic recovery, he said, pointing to OPEC+, an organization including the 14 OPEC countries plus the non-OPEC oil-exporting countries.

“OPEC + has done an amazing job at gradually ramping up production, keeping prices on balance,” he noted.

“I don’t think oil is going to be much higher from where we are. I see the energy market trading around 60 to 80 over the next few years.

“The global economy doesn’t want higher prices. In the U.S. we have the SPR. We could flood the market with oil to stabilize prices if we had to.”

The Strategic Petroleum Reserve is the world's largest supply of emergency crude oil.

Moderately bullish

It’s in the interest of OPEC+ to contain higher prices because the member-countries compete with one another, he explained.

“You have the consumption of renewable energy worldwide, which poses a threat to fossil energy even though it’s not an immediate threat. It may take a decade before it becomes manifest. But in the meantime, oil producers are competing to get market shares. It gives OPEC + greater incentives to ramp up production.”

Another geopolitical factor could put additional downward pressure on oil prices by adding increasing world supply.

“If the U.S. lifts sanction on Iranian oil it would be a game changer,” he said.

Even without this possible but unpredictable event, oil prices should only rise at a modest pace, he predicted.

“Demand will increase but it will be slow as we go through this new Covid variant. Supply will continue to increase steadily.

“You’ll have price spikes in oil. But I see the price hovering around $80, not much beyond that,” he said.

Wells Fargo Securities, LLC is the agent.

The notes (Cusip: 13605W5Z0) settled on Friday.

The fee is 2.425%.

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