As the UK prepares to celebrate Christmas with the price of a litre of petrol dropping below one pound for the first time since 2009, Roberto Cominotto, fund manager of the JB Energy Transition Fund at GAM has issued a prediction that if proved correct will mean the phenomenon is certain to be short-lived.
Last week, OPEC confirmed its strategy for the next 12 months, he notes. “Oil production will be kept as high as possible to push producers with higher costs out of the market. However, we expect a price increase in the second half of 2016. While global demand continues to rise, supply will be increasingly scarce until 2017. The reason for this is that very few new development projects will be advancing with oil prices where they are right now. Prices will likely remain low in the coming months. Over the long term, however, they will have to stabilise at a level where producers can generate sufficient yield – in our view about US$70 per barrel. This is the only way they will be able to cover the global oil demand of 93 million barrels per day in the future.
“OPEC’s policy of virtually flooding the market to keep oil prices low and push competitors out of the market is having varying effects on the most important oil markets. The US shale oil market was the fastest to react and has already registered a decline in production that is set to continue. Saudi Arabia and Iraq, both OPEC members, are pumping out at capacity level. Therefore, we do not expect any marked increase in output in 2016. Only Iran will be able to significantly increase its production in the coming year – subsequent to the lifting of sanctions against the country. With the sanctions lifted, Iran should be able to increase oil production to one million barrels per day in 2016. It’s important to remember that oil demand is currently growing very strongly. Globally, growth in demand will be as high as just before the financial crisis. The International Energy Agency (IEA) is expecting demand to rise by another 1.4 million barrels per day in 2016. Ultimately, this could mean a significant reduction in oversupply in the coming 12 months. In 2017, a drop in supply outside the US could place the market into a supply deficit. Attractive upward potential for energy stocks
“These developments are opening up opportunities for investors. The oversupply of oil has passed its peak in this cycle. Many institutional investors are strongly underweighted in the energy sector. Within oil and gas, we prefer North American shale oil and gas producers with low production costs and solid balance sheets that are positioned to grow significantly, even with oil prices at well below 60 US dollars. However, other industries along the entire energy value chain which have also suffered from the collapse in oil prices are also attractive, including renewable energies. We are avoiding most major oil groups: Companies such as Total, Exxon and Shell must pursue three targets: firstly, they must secure dividends, secondly, they must keep production volumes at least constant and thirdly, they must not jeopardise their credit rating. This is hard to imagine with oil prices under $70.”