Your IndustrySep 28 2015

Investing in Oil - September 2015

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    Investing in Oil - September 2015

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      Introduction

      By Ellie Duncan
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      Analysts and investors are wondering whether the price of the commodity has bottomed or indeed whether it will ever top $100 per barrel again. For now the oversupply of oil from Saudi Arabia and a fall off in demand from China are dragging on the commodity’s price.

      Perhaps most telling of all were the comments made by Shell chief executive Ben van Beurden to BBC News in September. When asked where the oil price might go from here, he replied: “The honest answer to that is I don’t know.”

      Thomas Smith, head of oil and gas sector research at Neptune Investment Management, explains: “Despite falling nearly 50 per cent in the second half of last year, crude oil has fallen a further 15 per cent during 2015. The forward curve has flattened even more, with expectations for Brent crude at the end of 2018 falling from $76 at the beginning of 2015 to barely above $60 today.

      “Clearly the market has begun to take the view that oil prices will remain lower for longer.”

      He notes that Opec’s stated production ceiling is 30m barrels per day. Its production in August this year was 32.3m barrels per day, or two million higher than a year earlier.

      Mr Smith continues: “This was largely driven by strong production in Saudi Arabia and Iraq; the Saudis are still striving to gain market share, while the unblocking of infrastructure bottlenecks is supporting growth in Iraq. Added to this is the likelihood that Iran increases production over the coming 12 to 18 months as sanctions are lifted.”

      But oil exporters, such as those countries in the emerging markets, have suffered acutely from the fall. And falling commodity prices almost certainly played a part in the Federal Open Market Committee’s decision not to hike interest rates at its September meeting.

      Commenting on the current outlook for commodities, Philippe Ithurbide, global head of research, strategy and analysis at Amundi Asset Management, points out in a recent research note: “China’s major contribution to demand for commodities has translated into an across-the-board drop in prices. This situation is compounded by recent supply-side developments, most notably in oil with the impacts of shale oil, Saudi Arabia’s stance and the reopening of trade relations with Iran.”

      There have been some positive side effects, though. Chris Iggo, chief investment officer of fixed income at Axa Investment Managers, observes the oil price fall has been a boon for consumers in Europe, Japan and the UK. They have, of course, been feeling the benefits of the drop at the petrol pumps.

      He goes on: “It is very good news for consumers in emerging markets and for economies that have a higher energy intensity than the developed world. Commodity prices fell in August, prompted by the Chinese volatility, but they have bounced back a little and have broadly been flat since the end of the second quarter.”

      Ellie Duncan is deputy features editor of Investment Adviser

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