MARKETS Commodities

No rebound in sight for oil prices

Oil prices are unlikely to rebound significantly from current levels, with a glut of supply and increasingly advanced methods of extraction set to keep the commodity’s price lower for longer.

Oil has fallen sharply in the last month, with the price of Brent crude retreating more than 10% from 56 dollars at the start of March to below 50 and then it went up again.

A jump in inventories, thanks to a spike in output from the US, alongside a switch in positioning by hedge funds has been blamed for the slump. While some observers argue these are short-term factors that will unwind, Jones says the environment for oil had changed drastically on both the supply and demand side. As a result he sees limited potential for the commodity to rise significantly from here.

Having been through their own recession, US exploration and production companies, and those focused on shale, are now able to operate in a lower oil price environment, That means the structural price of being able to get new oil supplies out of the ground has fallen, mainly thanks to significant improvements in the technical ability to produce oil, and therefore the price will remain lower than most people think.

Supply side statistics have rocketed since the revolution in US shale production, with the price of Brent more than halving in response, down from previous levels above 100 dollars a barrel. At the same time, demand has failed to keep up with climbing supply. While it has recovered off lows seen at the start of 2016, global demand is now running at 97.89 million barrels a day, below the 98.29 million barrels of global supply. While demand is not predicted to peak for more than a decade, Jones said it was nonetheless being constrained by a shift in attitude globally towards energy conservation. “We are now in a world which is becoming much more conscious about how it uses oil energy, and wants to replace it with other things.

Stephen Jones - chief investment officer - Kames Capital

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