Firstly, production is uneconomic for many operators with benchmark West Texas Intermediate (WTI) and Brent Crude hitting lows sub $50 a barrel at the end of January, so supply would adjust in time and lead to a tighter market. Secondly, I took the view that the decline in the price was out of sync with the global economic growth forecasts for this year and next, so if supply readjusted downwards then it wouldn’t take much to send the oil price rallying if demand proved more robust than many had envisaged. We are already seeing this scenario pan out as the number of rigs operating in fields in the US has hit a six month low as shale gas operators adjust to lower prices, and both WTI and Brent Crude benchmarks have rallied by over a third from their winter lows.
The oil price momentum is unlikely to stop here either as the 1.5m barrel a day surplus in the global market which depressed oil prices earlier this year is only marginally above the 1.2m barrel a day growth in global demand forecast by OPEC in 2015. A market in surplus could easily become a tight market if global economic conditions confound the sceptics as I believe will be the case. I am not the only one thinking this way as hedge funds are betting on a continuation of the oil price rally. In fact, one notable Swiss based fund is predicting Brent Crude will hit $82 a barrel by the start of next year.