Analysis of the current oil price and the futures market by Henderson Global Investors indicates that the commodity is likely to remain range-bound at US$50 ($65) a barrel for the medium-term.
Since the OPEC decision in early October 2016 to limit production, oil markets have been steadily rebalancing, said Henderson.
“While this doesn’t negate the effect of currently high levels of global inventories, the forward curves illustrate how the forward curve has effectively shifted up and flattened,” said the fund manager.
“This is historically associated with positive performance for the immediate future as there is less incentive to produce today and forward hedge (prices are flat for the immediate future).”
Incentives created by current oil prices mean that US shale producers have been picking up market share. OPEC and Russia have also benefited from increased revenues.
Saudi Arabia’s proposed IPO of Aramco, which would potentially be the largest listed company in the world eclipsing even Exxon Mobil, would benefit if the oil price held steady in the US$50 range.
“A major objective of Saudi oil production would be to maintain pricing at these levels to keep them low enough not to encourage a major increase in shale production, but high enough to provide a reasonable valuation on oil reserves,” said Henderson.
“Current oil market pricing in the mid-US$50 range is a ‘sweet spot’ for all major oil market participants, including OPEC, Russia and the more productive and cost efficient North American shale producers.”
Barring unexpected events, brent crude oil will have an effective floor of US$50 a barrel, said Henderson.
“The abyss oil markets experienced in early 2016 provided an insight into the instability created by an oversupply in energy markets, and this will be front and centre to Russia and OPEC in encouraging strict compliance with production quotas,” said Henderson.
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