This year has seen commodity prices across the globe plunging and the decline of the oil price in particular has provided many differing talking points and opinions. Brent crude and WTI have collapsed from around $60 last Christmas to around $36 today. What investors are now looking at is whether oil is set to rebound next year or is there worse to come?
The bull case
Contrarian investors around the world are looking at the current oil price as one of the best opportunities of the decade. As a commodity, the price of a barrel of oil is a response of supply and demand. Right now the world is heavily oversupplied but supply is falling and demand is increasing. Wood Mackenzie has said that over $200bn of new projects have been cancelled or delayed by the world’s major oil companies in the last 18 months.
This lack of investment will affect supply in the future and create an environment where supply can’t meet demand, thus leading to an oil price spike. Added to this, demand is set to rise too. According to the EIA, it will be 2.8 million barrels a day higher year-on-year at the end of 2016. As a response to lower prices, US production will fall by 500,000 BOPD and other countries are producing less too due to profitability issues. The changes in supply and demand in the next year should set up an oil price rise that may continue for years.
The bear case
Goldman Sachs has been calling oil down to $20 for a few months now and has been right so far. The world is awash with oil and with OPEC continuing to pump even more, it looks set to stay that way. Global growth is sluggish to say the least, which creates concerns for demand in the future. With such a low oil price, you would expect demand to increase as world growth increases. However this isn’t happening on the scale that many thought. Why? The emerging markets of the world are drowning in debt and are struggling to grow at the rates they did only a few years ago.
Meanwhile debt-laden US shale producers may not survive, but the assets will. There are billions of dollars in private equity vehicles ready to swoop in and take these assets for peanuts should the shale producers fail. The simple fact is that US shale production is here to stay in the long term even if production rates take a tumble.
Personally I see a small oil recovery next year and by Q1 2017 I expect the oil price to be over $50. I also see supply issues due to the huge decrease in spending of oil and gas companies worldwide. There will, however, be more pain before then and I believe the oil price could go into the $20s before any real progress will be made.
With that in mind, you might feel inclined to stay away from commodities. After the bloodbath that has been 2015, there are many opportunities out there in other sectors.
