Having hit close to $54 a barrel in late May, the price of Brent Crude oil has plunged to just over $44 a month later, a decline of 18% and its lowest level since the turn of the year.
These falls have been attributed to a combination of rising supply in the US and a diplomatic row between Saudi Arabi and Qatar.
However BNP Paribas’ multi asset solutions team says it is too early to go overweight in the asset class at this stage.
“We think these market moves are consistent with the view that the oil price correction has been driven by excess supply rather than a drop in demand,” said Joost van Leender, a portfolio manager on the team. We do not have to look too far for likely culprits on the supply side.
“For one thing, US crude oil production continues to rise and inventories remain high.
“Indeed, the market may simply be re-learning an old lesson that the US shale oil sector has fundamentally changed the supply curve, with elastic supply at a break-even price that was low two years ago and is probably even lower today.”
The waters for oil were further muddied by a decision by Saudi Arabia, Bahrain, Egypt and the United Arab Emirates to sever relations with Qatar.
The result has lead markets to assume markets it will now be even harder for OPEC to agree on further cuts in oil production.
“Saudi Arabi is currently stuck between a rock and a hard place,” said Stephen Bailey, co manager of the Liontrust Macro Equity Income fund.
“Any outside interference with a free market is often the wrong thing to do and in the oil market we are seeing that despite the OPEC production cuts, there remains a glut of new supply and growth is disappointing.
“As such we think that for the next 12 months the price of oil will trade with a three or four in front of it.”
