Ahead of the release of the IEA’s Oil Market Report on Friday, 16 January, Optima’s Graham Martin gives his assessment of the oil market for investors…
With such a fall in oil prices investors tend to stay on the sidelines till they are comfortable the price has reached the bottom. Of course once that happens, the price should rise quite quickly on oil and oil related stocks. The market will anticipate and recover in price ahead of the data which shows the actual increase in demand and/or decrease in supply. Thus for long term investors, buying into energy at these levels should prove beneficial – accepting there may be some more short term downside.
For those looking to identify early indicators to give them more comfort on entering the market, assuming the Saudis want to see US Shale production reduce, an early indicator will be the North American rig count. This data is a leading indicator on US Shale oil production and one which the market will respond to with regard to future supply. On 5 January the figures showed the US oil rig count was down 29 on the previous week but up 60 on the previous year. From circa 1,800 rigs in the US some analysts feel this could drop by a third.
On the demand side, anecdotal evidence is often the best early indicator. For example, individuals who fill their cars fuel tank each time will notice a difference in cost for a full tank. These lower oil prices should feed through into increased demand through increased use of cars, heating being left on for longer, etc.
How long will this last? A great question and difficult to answer but it is likely we are nearer the bottom than the next peak. As Warren Buffet says: ‘be fearful when others are greedy and greedy when others are fearful’. Right now the market is fearful.