A search this week revealed a headline suggesting that US oil companies are ceasing production yet immediately below another publication contradicted that assertion.
It’s so hard to get to grips with the state of oil production and consequently the price per barrel.
Oil prices still outside companies’ comfort zone
Earlier this week in our Spring Investment Outlook, we identified that oil prices stabilising around the $40 per barrel mark has enabled markets to breathe a sigh of relief. However, we did stress that, “breakeven value for oil for most companies is $60 a barrel, and so even though the oil price has stopped falling, it is still outside most companies’ comfort zone.”
While this remains so, we can expect to keep finding distress stories about the state of the commodities market clogging up our news feeds.
Key things to consider
A report released last week by the Guinness Global Energy Fund gave an interesting state of play for the oil market and called out some things to consider which could affect the direction oil prices move in.
One of the first things the report called out is that, Nine OPEC countries (Saudi Arabia, Kuwait, the UAE, Venezuela, Nigeria, Algeria, Indonesia, Ecuador and Qatar) as well as three non-OPEC countries (Russia, Oman and Bahrain) will meet in a joint OPEC/non-OPEC this weekend, on 17th April in Doha.
The meeting has been called to agree a production freeze at January levels and further measures to support oil prices. A production freeze would still require the market to rebalance ‘naturally’, but it would significantly reduce the risk that Saudi and its closest allies dump crude onto the market in 2016, as they did in 2015.
Others are less optimistic. Saxo Bank’s head of commodities strategy, Ole Hansen said of the meeting: “There’s been so much verbal talk and guesswork surrounding the meeting and the markets are just waiting now for whatever it may be. The expectations for a deal are fading a bit and I think that’s because developments elsewhere have reduced the need for them to do something”.
As one stops another steps up
Those developments might have something to do with US production of oil. The Guinness Global Energy reports a drop in January production levels, but it has slowed comparatively with December 2015.
But as one country slows production, another is continuing its relentless desire to make up for lost time. Iran’s production is on the up according to the same report.
Iran oil production chart
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Past performance is not a reliable indicator of future returns
Speaking about the imbalance, the fund managers of the Guinness Global Energy Fund said:
“World oil demand is growing at an annual rate of 1.2 million barrels per day, or a 100,000 barrels per day increase in demand per month. World oil inventories grew by 700,000 barrels per day in 2015. All things being equal, meaning no changes in global production, the oversupply would be eliminated in seven months as a result of demand growing. Not surprisingly, all things aren’t equal.
“The oil price decline is causing a sharp decrease in US onshore oil production. We estimate a monthly decline rate of 80,000 barrels per day, or an annual decline rate of about 1 million barrels of oil per day.
“Following the lifting of economic sanctions on Iran in 2015 the Iranian oil supply has been increasing and we believe will result in a net increase of 500,000 barrels of oil per day in increased production. We expect Iraq, which increased production in 2015, to have no growth in production in 2016. Libya is a bit of a wild card, as political strife has kept production below capacity. We believe Libya has the potential to increase production by about 400,000 barrels per day.
“We expect the oil price to recover once the imbalance is eliminated. Depending upon the factors discussed here, we expect that the oil supply to be balanced sometime before the end of the year.”
All eyes will now turn to Doha on Sunday.
Find out more about the Guinness Global Energy Fund.
The views expressed in this article are those of the Fund Managers at Guinness Global Energy Fund and not those of TD Direct Investing.
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