A supply and demand convergence may be about to be happen signifying the end of the shifting trends in the oil industry. The co-manager of Guinness Global Energy fund, Jonathan Waghorn, tries to explain why such a convergence is likely to occur soon.
Some hedge funds have suffered huge losses owing to the dipping prices of oils from the $100 a barrel last summer 2014 to the present $40 a barrel in 2015. This summer 2015 has been a brutal one especially for the energy markets.
Brent Oil went below the mark of $40/bl in August, and during that time, the energy equities dropped to around 25 percent. This was regarded as the most awful performing sector in this year. Brent Oil is a bit different from other oils; it is a type of oil that is regarded as sweet light crude oil.
Brent Oil Forms Benchmark for Crude Oil Worldwide
Brent oil forms the benchmark for determining the price of crude oils worldwide. This grade of oil is described as light because it has low density. It is termed as sweet because it contains low sulfur content. The Brent blend oil is mainly found in Norway and the North Sea along the coast of United Kingdom.
Investors and key players in the oil industry are searching for any signs that could redefine and turn things around. The ultimate tightening of the pivot scale of oil, and supply and demand seems uncertain. It is likely that a supply sign may come first because either the shale oil production by the US is declining or OPEC might be out to reduce supply.
Oil Production and OPEC
Oil production for June 2015 indicated a downward trend but April was the peak after OPEC production hit a record high. In Saudi Arabia and other countries like Iraq, the production in those regions hit a 30-year record high. While all things now seem to be equal, a supply and demand balance is likely to occur soon. However, it is most likely that demand is going to outpace supply come the second half of 2016.
At the moment, a number of OPEC members are beginning to experience economic stress as the debt takes an upward trend. Some Middle East countries are now experiencing increasing debts because their budgets are hardly covered at the lower prices of $40 a barrel. Right now, those countries are operating on budgets, which are not covered at such low prices of oils.
The $40 price of oil reached August 2015 may have some indication of the future of oil supply and demand as well as the prices. Today, the $40 price is considered the cash cost of oil supply even for the highest cost producers. When the oil price cycle is examined, this price is seen as the bottom.
How sustainable is the low oil price
The prevailing low oil price may go on for some time meaning it may be sustainable for a while. However, crude oil inventories may continue to build up as the US records seasonal refinery downtime’s. When the shoulder period is over, it is expected that the US will confirm supply declines and the OPEC will voice over its limited growth. There is little extra oil production capacity in 2016, meaning the overhang in oil inventory is going to be resolved and the prices may begin to get stronger.
Any sufficient drivers for a global demand of oil?
In 2014, there was low demand growth; however, in 2015 there was some improvement. There was growth expectation, which went up from 1 million barrels witnessed in January to about 1.6 million barrels every day. The transport sector drives demand for oil. In other sectors, oil has been displaced by cheaper alternatives but in transport sector, it remains unchallenged. Oil demand is therefore likely to continue increasing and it may reach 115 million barrels in a day by 2035.
Effects of current oil market prices on energy equities
Energy equities have suffered following the lower oil prices. However, it is expected that the equities will begin to recover when the demand and supply sentiments start favoring increases in oil prices. Energy equities may only attract fair value in the long run. There may be no positive signs until the year 2016, in the second half.
When a rebound of oil prices is likely to happen
A rebalancing may not occur until after the first half of 2016. Nonetheless, action taken by Saudi Arabian markets may have an influence as to when the prices rebound. When the objective of Saudi is achieved, meaning US production declines for more than nine months, it means by next March, those oil markets may start managing supply, and prices could start increasing.
It is more likely that the prices may not get to the $100 a barrel immediately; however, they may reach the $70 to $80 a barrel. Hedge funds are pessimistic owing to the plummeting oil prices. Until the prices of oil peak up sometimes in 2016, investors in Hedge funds in the energy sector may remain uncertain. Currently, the prices are rising and dipping, a trend that has become very unpredictable in the short term.
According to historical data, the $40 mark of the oil prices has always signified the bottom edge of the oil price cycle. Therefore, it’s only a matter of time and timing as to when the price will start picking. It will also depend on the objectives of the key producers including OPEC and the Saudi Arabian markets.