Shortly before Trump unveiled his decision Opec Secretary General Mohammad Barkindo warned that abandoning the deal would be harmful for the global economy.
Trump’s controversial decision has ruffled feathers in the investment industry, resulting in a collision between the crude bulls and bears.
Tom Elliot, deVere Group’s international investment strategist, said he expects to see a global market sell-off and weaker risk assets generally in the shorter-term.
He said oil, gold and the dollar could rally strongly if Iran, now the sixth-largest oil producer globally, chooses to take an aggressive stance to Trump quitting the deal.
Blackrock’s global chief investment strategist Richard Turnill believes oil futures now have a “geopolitical risk premium” as tensions in the Persian Gulf and the Middle Eat run high.
Ahead of Trump’s verdict on the 2015 landmark deal, Richard Robinson, manager of the Ashburton Global Energy fund, speculated oil prices could soar by another 15% by the year’s end, bringing them closer to the $90p/b level.
By contrast, Shawn Driscoll, manager of the T Rowe Price Global Natural Resources Equity fund said he wouldn’t be surprised if oil sinks to $30p/b by the end of 2018 or in 2019.
Iranian deputy oil minister Amirhossein Zamaninia recently identified $60 to $65p/b as the sweet spot for oil prices.
While Robinson said there has been a noticeable shift from a “market drowning in oil” to “a new reality of undersupply and low storage levels,” that will demand higher US shale production, Driscoll thinks the market is in danger of becoming overly saturated and looks more like the 20-year bear cycle in the 1980s to 1990s.
“While some market participants expect a return to even higher oil prices, we expect WTI prices will average $40-50 per barrel over the long term,” Driscoll said.
“When you look at a chart of real oil prices over the past century, prices above $40, in 2014 dollars, are considered unusual. The extension of the OPEC cuts may help to keep prices from collapsing, but we do not believe the OPEC cut is bullish. The longer oil prices remain at recent levels, the more incentive it provides to increase supply, particularly North American shale.”
All of the remaining signatories of the agreement with Iran, including the UK, France, Germany, Russia, China and the EU, have spoken out against Trump’s withdrawal and reiterated their commitment to keep the deal going with or without American support.
China is currently the biggest buyer of Iranian oil, purchasing over 700,000 bpd, followed by Europe, which imports circa 600,000 bpd and India over 400,000 bpd.
Avoid crude
The potential for oil price volatility is one of the reasons why Turnill has advised steering clear of investments in crude oil and energy related debt.
Instead, he prefers energy stocks, particularly exploration and production firms, as well as midstream companies and emerging market energy stocks.
“Oil prices have run well ahead of energy stocks this year but this trend has started to turn,” he said.
“One factor supporting energy firms: their focus on capital discipline, evident in first-quarter earnings results. Unlike in some past oil market rallies, companies are not making huge investments in future production. Instead, they are using free cash flow to return capital to shareholders via increased buybacks and dividends.”
A “hefty drop” in oil prices from a large US shale production boost or falling demand would have a knock-on effect on energy stocks but Turnbill argues current oil prices offer potential upside for the oil giants’ earnings and stock prices.
“Most energy companies have budgeted for mid-$50s oil prices in 2018, with this conservative outlook reflected in share prices today. This points to valuation upside should current levels of oil prices be sustained.”
Fed hikes
Others have pointed out that now is the right time in the economic cycle for oil prices to sustain their current highs.
VanEck portfolio manager and strategist, Roland Morris, believes “commodities have miles to run” off the back of the Federal Reserve’s rate hiking agenda.
There is typically a correlation between rising rates and rising commodity prices, which both tend to rise toward the end of the economic cycle.
Though Morris admits business cycles are never identical, he said there is reason to believe that we are most likely entering the late stages of this economic expansion, which will prove supportive for oil prices.
“There are expected, and possibly more aggressive, interest rate hikes over the next several years, and potential commodity supply constraints resulting from years of capital expenditure reductions in the metals and oil industries. Between these, we believe investors have more than enough reasons to reconsider their allocations to this space.”
