If you’re bearish about the oil price and expect it to collapse to $10 a barrel, you’ll be pleased to hear there’s an expert who agrees with you. If you’re feeling bullish and reckon oil could hit $60 this year, then once again, you have expert backing.
You can take your pick, because right now nobody really knows where crude is heading.
The bear case
There are good reasons to think oil could fall lower. John Brynjolfsson, founder of money manager Armored Wolf, is short on oil and reckons it may soon fall as low as $15, half today’s level. Last month, Standard Chartered said it could even hit $10 for the first time since the Asian crisis in 1998, driven largely by financial flows until “money managers in the market concede that matters had gone too far“.
Both are plausible, as oil-producing nations pump at full tilt to maintain share. Inventories are at record highs, with surplus supply of 1m barrels a day, even before Iranian oil comes to market. US shale is now hurting, but its resilience has amazed the world. The slowing global economy has hit demand. Cars are becoming more fuel-efficient. These factors may all explain why the oil price rally quickly ran out of juice, with West Texas Intermediate slipping below $30 again.
The bull case
There’s also a good case to be made for an oil price rebound, as energy companies slash investment, cull jobs and dump assets. Wood MacKenzie calculates that $380bn of oil and natural gas projects have been put on hold, cutting production by around 2.9m barrels a day. US production alone will drop by 620,000 bpd by the fourth quarter, according to the Energy Information Administration. That’s a drop of 7%. At the same time, global demand will increase by about 1.3m barrels a day, according to OPEC Secretary-General Abdalla Salem El-Badri. At some point, falling supply will meet rising demand and they’ll tuck into today’s supply glut. Oil will find its floor, then start climbing.
Shale oil billionaire Harold Hamm reckons oil will hit $60 by the end of this year. BP is betting the same way. Both may be guilty of wishful thinking. Or they may be right.
Oil price shock
You can’t rule out an oil price shock either, which could really send prices flying. Spare capacity is at zero, which sets up the market for volatility and price spikes. I think it’s worth building a position in stricken oil stocks, because at some point the price must surely rise. The problem is that nobody knows when, or by how much. The only certainty is that you won’t time the rebound correctly, because consistently timing any market is impossible.
Base your decision on your chosen oil company’s fundamentals, particularly net debt levels, to see how long it can withstand low crude prices. The price will eventually recover, you don’t want your stock pick to fall victim before it does.