Is this the beginning of another oil market crash or just a wobble in oil’s longer-term recovery?
The oil recovery was going so smoothly. Prices were edging up gradually and $60 – 65 dollar oil by the end of 2017, which many industry insiders were predicting, seemed like a reality. But then, collapse. Fears around OPEC’s ability to ease supply sent investors scrambling and pushed oil back into the mid $40’s. Is this the beginning of another oil market crash or simply an expected wobble in oil’s longer-term recovery?
“We thought that oil would continue climbing this year as the global recovery improved, so the weakness is quite surprising, it seems that OPEC just can’t get control of the market,” says Wayne Wachell, CEO of Genus Capital. “I thought we were in a cyclical upswing and that oil could go to $60 or $70, but it seems as though these thematic secular shifts are having a real impact on the price right now.”
Wachell sees oil’s struggles as being driven by lowered expectations in Chinese demand and a general evolution of the oil industry, caused by technology and innovation. The growth of fracking combined with President Trump’s attempts to deregulate the energy sector is also playing into oil’s unpredictable performance. “The U.S. can produce all the oil they need at about $45 a barrel, so that’s going to put a lid on the market,” Wachell says. “I just don’t see how the market can push up unless there is super strong demand out of China, but expectations from there are lowering.”
Despite the recent price slump, Wachell does believe it’s possible for oil to make $60 a barrel this year. He still believes in the reflation theme and highlights the central bank easing in Europe, Japan and China. “People are also still positive there is going to be some sort of tax cut in the U.S. and we’re in that part of the cycle where unemployment is getting low,” Wachell says. “Global demand should help push oil higher, but it is fighting a secular headwind with what’s going in with the renewable space and technology innovation in the oil industry itself.”
Oil’s recent drop reinforces Wachell’s belief that oil is not needed to achieve strong performance in a modern portfolio. “Technology is going to keep on lowering the demand curve for hydrocarbons and investors are fighting a losing battle here in ther longer term,” he says. “There will be cyclical balances, but they are not going to be as high going forward from a secular perspective.”