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Oil prices recovery not over yet

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In our latest investment strategy spotlight, we’re looking at the current state of oil and what may lie ahead in the short and long term.

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Oil prices recovery not over yet

In our latest investment strategy spotlight, we’re looking at the current state of oil and what may lie ahead in the short and long term.

Oil prices collapsed by -40% end-2018, emphasizing the structural excess in oil supply. Saudi Arabia increased its output just weeks before the US chose to grant eight countries waivers from Iran sanctions. Intensifying macro concerns also sapped demand expectations. 

Recovery from the collapse is not yet over. We expect Brent prices to creep back to a range of $65-$70/barrel. A number of factors support this trend: OPEC and Russia seem strongly committed to a long-lasting cut in output. US producers were caught off guard by plunging oil prices and are now indicating more moderate output. Tail risks are now dissipating, and global oil demand could revert to cruise levels. Lastly, oil market patterns are reasonably supportive, and the dollar is nearing its peak. Meanwhile, geopolitical implications are mixed for oil, although the situation in Venezuela does justify a slight risk premium.

Long term we expect more frequent turns in oil fundamentals to offer more tactical windows. The spectacular rise in US production means oil markets are now more structurally oversupplied. We do not expect prices to revert to their 2018 highs any time soon—barring any major geopolitical event. OPEC’s dominant position has weakened since the shale revolution, and regular shifts in OPEC vs. non-OPEC outputs could increase oil price volatility at every turn. This volatility would be magnified by a lack of visibility regarding the true supply/demand equilibrium level, and more political noise and tension could contribute to further unsettling oil prices.