With Brent crude having slid to within touching distance of the six-year low recorded in January, dropping to $45.56 as at 3.30pm on 21 August, the market must be wondering how much farther it can fall.
But while some are saying that now is the time to buy back in, Weldon, head of US equities at Artemis Investment Management, warned that the worst is yet to come.
“We have seen one the biggest energy booms in history in terms of capital expenditure and capital investment,” he said. “Typically these booms last for a while, then there is overspending and it takes time for the fundamentals to reset themselves.
“First people were talking about $100 dollar a barrel oil, then $90, $80 and $70. The market is still caught up in the fact that we are in an energy bull market and this is a correction, but the correction will go on longer and deeper than anyone expects.”
Having recorded a Q2 average of $62, the oil price has been yo-yoing around the $50 dollar mark in recent weeks, and Weldon believes that investors envisioning a return to the $100 region are kidding themselves.
“Markets are obsessed with oil now in the same way that they were with technology in the 2000s,” he explained. “Investors need to reach a state of complete indifference – to forget about energy stocks, and what the oil price is doing.
“In stock market terms, people think that we have had a rally which failed, and there will be another rally if Saudi Arabia cuts production or something like that. But the reality is that there was just massive overinvestment, and the price of oil could go a lot lower from here – maybe even as far as below $20.”
So, given the combination of US shale, increasing OPEC production and diminishing Chinese consumption, where does Weldon see prices settling in the long term?
“The oil price will be around $40,” he said. “What we need to remember is that emerging market growth helped the oil price – people are focusing on oversupply from the US and Saudi Arabia, but the demand side is weakening as well.
“It is possible that we will be past the worst of it in the next six months, but that does not mean that the sector will be a great investment after that. Historically, there have been long periods where the energy market has not done much – we have had the boom, we are having the bust, and after that it might be boredom.”
