The news that OPEC will continue operating at “current actual production” levels, while Indonesia re-joins the group sent oil prices that have more than halved in the past 18 months down to $40/barrel.
The organisation said it will meet again mid-next year to review its target.
Alex Dryden, global market strategist at JP Morgan Asset Management, says he expects oil prices to stay lower for longer, adding that the market is not going back to $80 per barrel anytime soon. Instead, he expects prices to be around $60 per barrel by year end 2016. “That means the sector will be one of the top performers during the coming 12 months. It should help BP,” he says.
So, who gains if the oil price stays at depressed levels for the foreseeable future?
The “new normal” winners are big blue chip oil companies that can get through the tougher environment, while smaller, high risk companies will struggle. “Large cap oil companies are the ones that will survive and diversify in the environment of a sustained low oil price. The smaller producers are under pressure as time goes on. They are heavily indebted, and if the oil price stays low for longer –if interest rates increase and the oil price decreases- it will be difficult for them to refinance,” explains Dryden.
Dryden says we should expect volatility across asset prices in the future. He also highlights the real geopolitical risk that investors need to consider in emerging markets, and particularly with oil.
However Adam Laird, investment manager at Hargreaves Lansdown, cautioned that with revenues low didvidend cuts might be on the cards, which is especially relevant given that the three oil majors count for more than £1 in £8 of the FTSE 100. He added that cheap oil is also good for transport firms. “Cheap oil is good for transport firms, whose fuel bills are falling. EasyJet recently announced that they expected around £150m of benefits from lower fuel prices in the current financial year,” he said.
According to Fiona Boal, director of commodity research at Fulcrum, cost accountants in the oil industry will gain going forward. “Nothing focuses the minds of company executives on efficiency and lowering costs of production like a 50% cut to top line revenue,” she says.
“When OPEC made the decision last Thanksgiving to stay the line on production levels and target market share at the expense of price they were betting on high cost producers being forced out of the market. This has started to happen but it has taken much longer than the OPEC oil ministers and other had expected. For example, some US shale producers have been able to cut production costs in excess of 25% over a relatively short period of time. It will only get harder for oil producers to make additional efficiency gain but the cost accountant’s job today is to ensure the leaner cost structures are maintained.”
