Oil: still in the tunnel but light glimmers at the end

It will not be now and it will not be strong but the oil price recovery could start during 2016. Frank Nicolas, head of investment and client solutions at Natixis AM thinks that “even if oil falls a bit further there is light at the end of the tunnel”. 

The collapse in oil prices is one of the reasons of the awful start in 2016. Weak global trade and Iran’s return to the group of oil-producing countries squeeze the barrel to the lows. Is there any hope of an end to this phenomenon this year? Frank Nicolas, head of investment and client solutions at Natixis AM thinks “that oil may have bottomed out” and that “even if it falls a bit further, there is light at the end of the tunnel”. In fact Nicolas points out the devastating consequences the low price is having on oil-producing countries on one side and the success of the Saudi Arabia’s strategy on the other.  “Saudi Arabia’s strategy to undermine US shale oil is working –explains Nicolas -. Even if this industry will not disappear thanks to its high flexibility, US banks may demand a higher cost of capital and the regulator may require a more conservative valuation of reserves in the business models of alternative producers”.  As for the other producing countries they could be tempted to buy social peace by rebalancing their budgets with an income boost. “From here on in, voices has already raised to this effect. Concerted action could resume within OPEC in order to get better control of oil production”. 

Nevertheless the investment strategy to implement does not entail a direct purchase of commodities. “For an indirect play, energy sectors in US and European majors could be considered, break-even inflation points are at their lowest in the US today and could benefit from tensions with a barrel price which will initially return to around 40 dollars”. The same goes for “developed currencies linked to oil” such as Canadian dollar.

Source: Frank Nicolas, Natixis Asset Management