As analysts were lining up to warn that the oil price could crash to $10 a barrel, it staged a shock fight back and jumped nearly 10% in a day. A barrel of Brent crude now trades at $32 after last Friday’s excitement, so is this the start of the recovery?
Oil’s Future
One man with a top-notch forecasting record certainly thinks so. Pierre Andurand, founder of the $615m Andurand Capital Management, is worth listening to, as he is one of the few to correctly predict the slump in oil prices. Now he claims the worst is over, and the price will probably rise to $50 this year and $70 in 2017, due to lack of spare capacity and falling production among non-OPEC members. Can he be right twice?
Andurand is in a minority. The oil price is being squeezed again on Monday, as Chinese diesel usage falls and Saudi Aramco says it plans to maintain current production levels. Moody’s has just slashed its price estimate to $33, citing a glut of supply and the forthcoming entry of Iranian oil. It reckons oil will rise by just $5 barrel on average in 2017 and 2018, as OPEC members battle for market share and consumption stalls in China, India and the US. Iranian oil output will make up for any production cuts in the squeezed US oil sector, Moody’s says. HSBC has just marked down its assumptions.
Oil Shock
Ask another 10 analysts and you will no doubt get 11 different answers. As ever, the truth is that nobody knows. Few predicted the oil price collapse, and few will accurately time its recovery. There are too many variables and the human brain cannot balance them all, nor can any computer program.
That said, I believe the oil price has to rise at some point. What goes down can also go up. Especially something that has been driven so incredibly low, so quickly. The world still runs on oil, and even though renewables are getting cheaper, it will continue to do so. Hundreds of billions of dollars of investment and production has come off-stream, because it no longer makes sense at today’s prices. At some point, supply will be squeezed too tight, sentiment will shift, the price will climb. Geopolitical shock could turbo-charge the process. It will happen, we just don’t know when.
Also, we don’t know how high oil can go. The flexibility of shale is likely to put a cap on any increase, and the days of $90 oil are over for now. Yet some kind of recovery is baked in and that makes oil one of the most tempting trades on today’s market, but only for investors who can stand another year or two of low prices, just in case the rebound comes later rather than sooner.
You might prefer to play any rebound by investing in an oil major such as BP or Royal Dutch Shell. Or maybe Tullow Oil, Ophir Energy or Nighthawk Energy. The rewards may be massive, but so are the risks. Where oil goes next is anybody’s guess, and right now, everybody is guessing.