11th December 2015
The price of oil has dropped 40% in the past year but 2016 is predicted to mark the beginning of the upswing.
A shortage of supply means the price of a barrel of oil, which is now trading at just below $40 compared with $65 a year ago, will have to increase, according to Roberto Cominotto, fund management of the JB Energy Transition fund at GAM.
Last week the Organisation of Petroleum Exporting Countries (OPEC) confirmed its strategy for the next year and oil production is set to be kept ‘as high as possible to push producers with higher costs out of the market’, said Cominotto.
Despite this increased supply, the price is expected to increase too in the second half of 2016.
‘ While global demand continues to rise, supply will be increasingly scarce until 2017,’ said Cominotto.
‘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, he said the prices will ‘have to stabilise at a level where producers can generate sufficient yield – in our view about $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.’
The OPEC policy of flooding the market to keep prices low in the short-term and push out competition is having different effects on the most important oil markets, said Cominotto.
‘The US shale oil market was the fastest to react and has already registered a decline in production that is set to continue,’ he said.
‘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.’
Demand for oil is expected to rise by another 1.4 million barrels per day in 2016 and 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,’ said Cominotto.
The developments in the oil markets are opening up opportunities for investor.
‘Many institutional investors are strongly underweighted in the energy sector,’ said Cominotto.
‘ 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.
‘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.’
He is avoiding most major oil groups such as Total, Exxon and Shell. Cominotto said they must pursue three targets in order to be attractive.
‘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,’ he said.