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Scotiabank’s Patricia Mohr remains positive on the future of oil. She expects prices to start trending upward in the first quarter of 2015.
As oil prices continue to crumble in the face of a sustained output glut, Patricia Mohr, Scotiabank economist and commodity market specialist, believes prices have hit the bottom and will start to rebound.
In a report released on Thursday, Mohr states that West Texas Intermediate oil prices are below what she calls the mid-cycle break-even cost, which averages US$60 to $61 a barrel.
“People don’t have a very good idea where production costs really lie. Sometimes they think that oil prices can move down to the lowest marginal cost, the lowest cost that a particular producer might be able to produce at. But for an industry you can’t have that happen for very long,” she said in a telephone interview.
While break-even costs average $60 to $61 across the US and Canada, they are slightly higher in the North Dakota Bakken at $69 — which Saudi Arabia is seemingly hoping deters the fracking boom currently underway in the US.
Oil prices will start to trend higher midway through 2015 and continue to rise, she said, as supply falls back into line with demand.
“As oil prices continue to tick up again, company valuations and stocks will move up. And in the past few days they are up probably off the bottom,” she said, adding that now is the time for investors to get into the game as she expects prices will not go lower.
Looking at the impact low oil prices are having globally, Mohr said Saudi Arabia’s (and by extension OPEC’s) decision to not curb output has negatively affected commodities and countries’ GDPs. Already, the sinking cost of oil is seemingly crippling Russia as its currency continues to fall and major store brands such as IKEA suspend business.
On the flip side, she doesn’t see New York’s ban on fracking harming the flow or price of natural gas.
“I think there’s going to be quite the big shift in the utility market in the US away from coal to natural gas and possibly some new applications for natural gas in transportation,” she said.
She expects natural gas prices to climb in 2016 and 2017 as more liquefied natural gas projects open up along the Gulf Coast in the US, with gas rising to the $5 to $6 mark late in the decade.
Securities Disclosure: I, Nick Wells, hold no direct investment in any of the companies mentioned in this article.
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