Thursday, 31 March 2016 09:00

Oil Price rising to $70 per barrel

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We recently met with Clay Smolinski, Portfolio Manager at Platinum Asset Management and discussed with him why they believe the oil price is likely to rise to $70 per barrel over the next couple of years.















Here is the transcript of the video too.


Mark Draper: Here with Clay Smolinski, Portfolio Manager of Platinum Asset Management. Thanks for joining us Clay. We’re talking about the oil price today, which has been smashed back from $100 a barrel recently over the last couple of years back to around $30, $40 a barrel as they’re today. How do you see it playing out from here?

Clay Smolinski: Certainly. So from here, we see a fairly realistic case of where the oil – where oil is on a path back to roughly $70 over an 18-month period. But let me quantify that. So first of all, why do we think the price is going up at all? And it’s simply because we see that supply and demand balance starting to tighten.

So we can go through some simple maths. So at the start of 2015 is when the oversupply in oil became very apparent and at that time, we had a global oversupply of about 2.5 million barrels a day. On top of that 2.5, we can add a million extra barrels of production coming from Iran. That it’s going to step up production after the US sanctions were lifted. So starting base, 3.5 million barrels of oversupply to work through.

We can now think, “Well, what has happened since then?” So from the demand side in 2015, demand did what you would expect. The price fell and people consumed more. So demand was actually strong and it grew by 1.5 million barrels in over 2015.

On the supply side, we saw the first effect of the big reduction in activity in the US shale-oil markets and US shale production fell by half a million barrels. So combining that, we can take 2 million barrels off that oversupply and that leaves us with 1.5 starting 2016 now.

So what do we expect? Well, the activity cuts in US shale have intensified and we think you will see at least another half a million barrels of production coming out of that market this year, probably more like 800,000 and then it comes down to what’s demand going to grow at this year.

We think demand should grow at least by say 700,000 barrels, somewhere between 700,000 and a million barrels a day and that’s being underpinned by additional oil consumption out of China. So China’s oil demand is still growing by say 400,000 barrels a year.

So you’re putting that together. You can quickly see how we move from heavy oversupply to a balanced market. Then the other question is, “Well, why $70? Why does that make sense?”

The way we look at all the framework is since 2009, so the last seven years, the world is now consuming six million barrels a day of oil more. So we’ve gone from 84 million barrels of consumption in 2009 to 92 million barrels today.

Where did that additional six million barrels of oil come from? Well, four of the six came from US shale alone. So the US was absolutely integral to meeting that additional demand. How did they do it? Well, they really ramped that industry up by using a lot of debt and issuing a lot of shares, raising a lot of equity. We think that game is up now.

The market is now looking at this industry and saying, well, you need to be able to fund yourself. Now, as we move into a situation where the US – where oil demand is growing again and the US is going to move us from a situation of falling production to needing to grow again, to meet that high demand, we can then work out, “Well, what price of oil do US shale producers need to have to be able to fund their existing operations and generate enough cash to be able to drill more wells?”

When we look at the cost base of that industry, it’s roughly $70 to $80 so that’s how – that’s our line in the sand for the oil price.

Mark Draper: Those are very valuable insights and it comes back to supply and demand like every other market and we really appreciate the in-depth view on that.

Clay Smolinski: Absolutely.








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