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Monday, January 12, 2015

Will Oil Price secure at around $35 to $40?

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Few areas have escaped the stock market down turn – some have performed worst than others. The price of oil has fallen from a peak of $147 to around the $40 mark which could be throwing up a buying opportunity. Oil prices will continue to drop as high production meets weak demand and a strong U.S. dollar pressures crude, and markets will only pick up once major manufacturing economies particularly in Asia feel the benefit of cheaper energy. Saudi Arabia accounts for nearly one-third of current OPEC production, or approximately 9.86 mbpd in the month of November. Still, production capacity is nearing 12 mbpd and Naimi suggested the oil-rich nation might put it to use sooner rather than later. It’s all part of a plan to demonstrate that high-efficiency producing countries deserve the greatest market share – an idea Naimi describes as the operative principle of all capitalist countries. OPEC produces around 40 percent of global output, but non-OPEC production isprojected to grow 2.3 percent next year after a 3.5 percent expansion in 2014.

Oil reached a peak of just under $150 a barrel last year – today it stands at jaround $40. The demand that pushed the price to record highs has slumped as many global economies have slowed. Crude may drop below $40 a barrel in the next few months without a substantial slowdown of production growth in the U.S. and Canada, said Doug King, London-based chief investment officer of Merchant Commodity Fund. Bearish oil wagers in the second half of 2014 helped the $260 million fund gain 59.3 percent, the best performance since its June 2004 start. Brent futures lost 48 percent last year, the most since 2008, as the Organization of Petroleum Exporting Countries resisted calls to cut output. 

The U.S. is pumping the most crude in more than three decades as horizontal drilling and hydraulic fracturing unlock shale reserves, adding to a global supply glut that Qatar estimates at 2 million barrels a day. The impact of lower oil prices on America’s stock market became apparent on Monday, January 5, when a five-percent drop in oil prices hit energy sector stocks so hard that they dragged the major stock indices more than 1.80 percent lower.  It remains to be seen how depressed oil prices will continue to impact the stock market over time.  While many energy sector analysts expect that oil prices could fall to $40 per barrel, bond guru Jeffrey Gundlach recently warned that $40 oil could bring mass layoffs to the energy sector.

Some analysts are reticent to suggest how long the global recession will last, but when the stimulus injected by central banks begins to filter through the demand for oil will pick up. Several already believe that investors should start to look at oil – they do not say the price has bottomed or a spike in the price is imminent, but they reckon that a floor cannot be too far away. Demand for oil has collapsed because of the very weak economic conditions, and the price of oil has fallen as a result. Production is also falling – non-OPEC production peaked last year and is now on the decline. 

Gary Dugan, Chief Investment Officer, EMEA, Merrill Lynch GWM, reckons that for those who want to trade oil, we are very close to buying levels – anything below $35 is a buying opportunity. He says: "When the oil price starts to move towards $30 a barrel it starts to cost more to extract oil than producers can get by selling it, so production facilities get shut down as they become uncommercial. We expect the annual production of oil to fall by as much as 5pc a year over the next five years, which should create a floor for the oil price. We believe that oil will bottom out at around $30, and will average between $40 and $45 over the course of 2009, subsequently rising to around $55-60."


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