So if Opec and the US keep increasing production, who will cut back? It is predicted that other high-cost producers, primarily deep-sea and oil sands, will bear the brunt of the pullback in investment.
Low oil prices have helped demand for crude recover. Demand from both developed and developing markets is now increasing. (Before the price decline, developed market demand had plateaued.) China, meanwhile, has used bargain prices opportunistically to build strategic reserves.
While it will take time for an adjustment to occur, supply should tighten as expensive projects fail to get signed off. Projects already in the pipeline, however, present a hangover for the oil market. Demand is recovering in spite of all the fears of a China-led slowdown. Investors willing to withstand some of the near-term volatility could benefit from an oil price recovery within a year.
Nitesh Shah is associate director of research at ETF Securities