Oil has traditionally been a highly volatile asset class, as its price is being impacted by a lot of different factors, not least politics. But in the past two months, after a quiet start to the year, volatility has edged up a notch.
Hermes Investment Management believes the rollercoaster ride may continue for some time to come, with the oil price fluctuating between $45 and $55. Because of the new status of US shale oil as a swing producer, increasing demand for oil resulting from stronger economic growth will not anymore impact the oil price as much as it has done before. As soon as demand for oil rises, US shale oil producers will increase production, neutralising the otherwise positive effects of this on the oil price.
OPEC’s decision to cut production by more than a million barrels a day lifted oil prices higher at the end of last year, but also encouraged US shale oil producers to start drilling again.
“Capital expenditures are expected to increase approximately 30% year-on-year. While capex remains at half of the industry high in 2014, improved shale productivity is enabling producers to break even at $45 a barrel. This, along with a rapidly rising rig count and an uncompleted well inventory, points to US production growth in 2017 – estimated at between 0.2m and 0.9m barrels per day,” said Audra Stundziaite, Senior Credit Analyst at Hermes Investment Management.
The bull case
While the case that the shale oil revival should arguably keep oil prices in check this year is easy to make, Simon Laing, head of US equities at Invesco Perpetual, takes a contrarian, bullish view on the oil price.
“We see an oil market recovery in place, but one in which few have much confidence. And that is the opportunity,” he claims.