Oil at $20 a barrel presents ‘fantastic buying opportunity’

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The time to plunge back into oil may be edging closer with some believing the price is set for a significant bounce over the next 12 months.

While global commodity prices have been hammered over recent years, chiefly on the back of lower demand from China, the plummeting oil price has been in the wake of over-supply.

But Canada Life Investments senior portfolio manager Alex Lee says, despite the price of oil nose-diving by almost 40 per cent in 2015, demand actually accelerated during the year.

Lee says: “With the oil price having fallen to less than $30 a barrel, it could conceivably fall all the way to $20. And if it does, it would represent a fantastic buying opportunity.”

However others think the cost could slip even further. Earlier this month Standard Chartered warned the oil price could drop to $10 a barrel amid fears of a further devaluation of China’s currency.

“We think prices could fall as low as $10 before most of the money managers in the market conceded that matters had gone too far,” the Asian-focused bank said in a note.

Morgan Stanley also recently said it believes prices could reach $20 a barrel in 2016.

While the many are hoping oil cartel Opec could release more stock in a bid to keep the cost in the doldrums, Lee suggests that this is unlikely.

“By historic standards, Opec supply is now pretty much maxed out. Saudi Arabia and Iraq already boosted production in 2015.

“Iran will no doubt increase oil exports as its sanctions are lifted at the start of 2016, but after this we struggle to see who within Opec can drive supply growth going forward. In fact,Opec has very little spare capacity left,” he adds.

As a result he expects the supply of oil to stabilise and Opec production to plateau in the first half of 2016, while North American production could drop back in the second half.

Meanwhile, demand growth is likely remain steady supported by cheap prices.

Lee adds: “Fear and greed often lead to asset prices overshooting in one direction or another as price action reflects psychology and not fundamentals. This is taking place in energy markets today as a confluence of bad news has caused commentators to predict an energy apocalypse that does not reflect fundamentals.”

While he expects the oil price could retreat further, Lee is confident that prices will end 2016 at a much higher level than today.

He adds: “Based on this fact, we believe we are nearing the time to buy oil.”

On Wednesday, WTI Crude was trading at $30.78 per barrel while Brent was at $31.53.