These days hearing positive things about the oil price is fairly rare, so when Sid Rajeev of Fundamental Research talked about being very bullish on oil at the recent Canadian Investor Conference in Vancouver, oil-focused investors were all ears.
The Investing News Network caught up with Rajeev after the conference to get more insight into where he sees the market heading in the near future. Encouragingly, Rajeev said he sees the oil price reaching the $65 to $70 range by the end of the year; in the next three to four years, he expects it will move up to the $70 to $90 range.
Supply and demand expected to balance out
Rajeev began the conversation by outlining the three main factors that affected the oil price in the second half of last year and the first quarter of 2015. He first mentioned the appreciation of the US dollar, which has had an impact on commodities across the board.
Second, he said that oil production exceeded consumption in the second half of last year and continued to do so during the first quarter of 2015. That might sound negative, but Rajeev believes the supply-demand balance will start to regulate itself as the oil price drops. ”The good thing is that now you are going to see demand slowly catching up to production, and also you’ll see stock levels going down — [those] are very strong indicators that prices are going to start to recover,” he said.
OPEC takes a stand against US shale
The third factor Rajeev mentioned, and which he considers most important, was OPEC’s November 2014 decision to maintain a production level of 30 million barrels a day. ”The main reason I believe OPEC decided not to cut supply is to maintain its global market share [and] continue to dominate the oil industry,” he said.
The oil price took a big hit on that news, but according to Rajeev, OPEC will likely revisit its decision. That’s because oil is an important GDP driver for its member countries. ”If you look at Saudi Arabia, more than 40 percent of its GDP comes from oil. So this decline in the oil price is affecting 60 percent of the revenues that are coming from oil. So would [Saudi Arabia] rather continue to take a stand and keep prices low, or go back to its traditional attitude to cut production, let prices increase and maintain or at least have a lower GDP.”
For now, however, OPEC’s continued production is having an impact on non-OPEC producers like the US. In fact, the International Business Times reported Tuesday that the US shale oil boom is beginning to fade — the US Energy Information Administration sees oil production from the two largest shale plays, North Dakota’s Bakken and Texas’s Eagle Ford, dropping by 1.3 percent, to 5.58 million barrels a day, this month.
Rajeev explained that if the oil price doesn’t improve, the US could cut back production by 3 to 4 million barrels per day. According to his research, if that happens, OPEC’s current capacity will only allow it to increase production by 2 to 2.5 million barrels a day, meaning it will not be able to offset the decline. ”I am thinking six to 12 months is when you’re going to slowly start to see OPEC changing its attitude towards supply,” he said.
Rajeev said that his firm doesn’t have any top picks in the oil space at the moment. However, he encourages investors interested in playing the possible oil price uptick to look at oil-focused indices. One in particular that he follows is the BMO Junior Oil Index ETF (TSX:ZJO).
Securities Disclosure: I, Kristen Moran, hold no direct investment interest in any company mentioned in this article.
Editorial Disclosure: The Investing News Network does not guarantee the accuracy or thoroughness of the information reported in the interviews it conducts. The opinions expressed in these interviews do not reflect the opinions of the Investing News Network and do not constitute investment advice. All readers are encouraged to perform their own due diligence.