Reuters reported that Brent crude has touched $63/barrel. The market continued to discount bearish news about global inventory data suggesting an oversupply of up to 2 million barrels per day. Instead, threats to Middle East crude production and the falling U.S. oil rig count seemed to spur market bulls.
Michael Hulme, manager of the Carmignac Portfolio Commodities Fund, spoke to Emma Wall, editor at Morningstar.co.uk, about the crude oil situation. Below is an excerpt from the conversation.
On what led to the depression in oil prices..
I think we've had a considerable period of volatility in oil prices recently and I think it's no surprise that that has followed a period of a number of years of stability. It's almost like a Minsky moment. Minsky probably should have won a Nobel Prize for his work.
(A Minsky moment is when a market falls into crisis after an extended period of market speculation, or unsustainable growth. It is based on the idea that periods of speculation, if they last long enough, will eventually lead to crises. It is named after Economist Hyman Minsky who was vocal about the inherent instability of markets, especially bull markets. After several years of steadily growing output and low inflation, investors, banks, companies and consumers develop a misguided confidence that such benign conditions will continue. They are happy to increase their borrowing and lending. As they do, the riskiness of the system steadily increases.)
This period of stability in a way has, with a quite elevated oil price north of $100, set the scene for quite considerable supply growth coming out of North America and particularly within North America the shales, the U.S. shales, the Eagle Ford, the Bakken and to a lesser extent the Permian.
(
Eagle Ford Shale is a South Texas geological formation with a large amount of oil and natural gas. The Permian is a century-old oil play covering much of west Texas and southwest New Mexico. North Dakota is the nation’s second-largest oil and natural gas producer. According to a report, The Bakken Shale Play in North Dakota is estimated to hold 11 billion barrels of oil.)
Now, that supply has been building up over a period of years and OPEC has really sort of struggled to cope with that incremental supply, cutting production here and there and they have been various capacity outages which have kept that stability, if you like, going for a little bit longer than most people would have predicted.
Then in the summer of last year what we noticed was that that supply was beginning to have a more of a profound impact on markets. I think when we saw that sort of appear in the storage numbers, inventories started to build, the rapidity of growth in the Eagle Ford really started to have an impact on markets.
Then we saw a big spike in Libyan production and quite considerably tight markets elsewhere in OPEC in terms of higher levels of supply. Then we saw something give, and that's when we saw the oil price really collapse. And I guess the icing on the cake, if probably the wrong thing to call it, was obviously Saudi's decision not to cut production. Unsurprisingly, really when you consider the Saudi's are in a sort of proxy conflict with Iran over Syria and Assad and obviously, it favours the U.S. position on Russia with regard to sanctions that the Saudis would refuse to cut given the Russians' involvement also in the Syrian conflict on the side of Assad. So, all of those things came together and we saw this collapse and I think we are now seeing this sort of washing out of the system.
Price of oil going ahead...
We'll see a considerable period of volatility.
We hit the mid-40s. I think we are back at $60 now on Brent. We could see some downside or volatility in the near term as the storage levels continue to creep up, but I think longer term and the medium term we will see supply coming off.
We've seen the rig count decreasing. We'll see the market tighten up and I think with the sort of 12 to 18-month view we can be fairly confident, barring an economic catastrophe, that we will see oil prices north of $75 again.
Once you see the situation stabilise, once you see supply begin to contract with the impact of less drilling and once you see declines kick in particularly in, say, Russia where there is obviously sanctions regime, it's hard to get new investment in and drill new wells, you will see oil prices stabilise higher.
