The Organisation of the Petroleum Exporting Countries has again held oil production levels at 30 million barrels per day in an attempt to get more market share.
The decision was expected by many, but various questions remain unanswered.
Is there a risk of a further oil price drop because of oversupply? And is the current low oil price sustainable or temporary?
JP Morgan global market strategist David Stubbs says the results of the Opec meeting is confirmation we are in a “post-Opec world” as country members are not “sticking to the rules” as they continue to oversupply oil.
He says: “Opec is not doing what it did in the past decade, which is holding production down to push the oil price up. They believe their strategy is working to maintain market share: pushing production high and price down. But for the first time, Opec is not having the dominance of global production that it once did. There is not internal discipline because some countries continue to oversupply oil and are comfortable with keeping the oil price low.”
In Opec’s meeting in Vienna earlier this month, members said world oil demand is set to increase in the second half of the year and in 2016, with growth driven by non-OECD countries.
ETF Securities commodities specialist Nitesh Shah acknowledges growth in global oil demand has picked up “tremendously” in recent months thanks to the weak oil price but fears this will not last long.
“The positive news was Opec’s forecast on increasing oil demand so markets have been reacting to that. But I would caution against that optimism because the gain in demand is probably largely to do with the fact prices were weak and if demand is that price-sensitive and prices are due to rise, that demand will eventually weaken,” says Shah.
However, as the oil price remains low, currently at around $60 a barrel, a strong economic growth path is expected in the second half of the year, with most of the world benefiting from a lower energy price level, leading to them consuming more.
Axa Wealth head of investing Adrian Lowcock says a low-price environment is good for the economy and will boost sectors such as manufacturing and infrastructure as well as equity investments in countries such as India and Japan, which are big oil importers. However, pressure on oil price will remain, he argues.
He adds: “What we need to look for is a sustained increase in prices for supply to be cut back. While the intentions are there to cut back supply by high-cost producers like the US and Russia, it’ll take time for that to materialise and we will start to see more of that cutback in supply over the course of the next six months or next year.”
Lombard Odier private banking investment strategist Sophie Chardon says a sustained rise in oil prices towards their 10-year average of $85 a barrel “would quickly become inflationary, restrain central banks’ ability to ease or even force them to tighten, with the risk of triggering a bond market sell-off that would spill over to other assets”.
As a consequence, she says asset allocation “would certainly have to be adapted”.
“Investors should structure their portfolio on the assumption that the oil price will remain below $80 a barrel in the next two years.”
Chardon believes oil prices will remain very volatile over the next few months before stabilising for a couple of years at levels well below the past decade’s average.
Columbia Threadneedle commodities portfolio manager Nicolas Robin says: “Short-term, I will not be surprised if we get a bit of a market correction but if we do get one, it is going to be a good opportunity to get back into the oil market but also across commodities in general.
“We were overweight oil until late last year, which didn’t work so well, so we’ve reduced the position by 3 per cent.
“Historically we tend to be carrying a fairly significant weight in the oil sector but now we are overweighting gasoline because this is where we believe the strength lies.”
Opec’s decision not to cut oil price is also an attempt to put pressure on US shale oil producers, which need a higher oil price to be profitable than producers in traditional extraction methods.
Analysts say the US shale production, which has turned negative, will likely continue to slow down over the coming months, given the underlying effect of high decline rates.
US oil production levels are expec-ted to be around 600,000 to 700,000 barrels a day.
Julius Baer head of commodity research Norbert Rücker says he maintains a “neutral view” on the oil market but sees near-term price risks “skewed to the upside” as declining US shale production will likely tighten markets faster than anticipated.
“The market underestimates how quickly the combined effect of production declines and seasonal demand strength could tighten today’s excess supplies in North America.”
He believes more challenging times are looming for Opec members.“Depending on the outcome of the so far promisingly progressing nuclear negotiations, Opec will likely need to make room for the return of Iranian exports next year. Simultaneously, Iraq and Libya are determined to grow respectively and rebuild production over the coming months. The shaky political situation and government funding remain issues for both countries.”