Oil price set to rise
Over the next two to four years, oil could reach the old highs of $150/barrel according to Angelos Damaskos.
By Angelos Damaskos, Chief executive, Sector Investment Managers
Tuesday September 14, 2010
At the turn of the century we entered a commodity super cycle, underpinned by robust growth from emerging markets and increasing demand for energy and raw materials.
There have been two super-cycles in recent economic history, the first at the turn of the nineteenth century, resulting from the industrialisation of the US and the second, from 1945-1975, was a result of the post-war reconstruction in Europe and the Japanese economic expansion.
The high and rising intensity of the use of metals and oil is the best indicator of a super-cycle. China's intensity is three times that of the US, and its rapid industrialisation and domestic needs rule its demand for energy and materials. The big question is how long this super-cycle might last, and how it will be impacted by the recent financial crisis and resultant world economic problems.
Investors in smaller oil companies must be willing to accept a certain amount of volatility, resulting from the influence of short-term market sentiment. However, smaller capitalisation companies controlling large reserves can also offer attractive growth potential. Investors should focus on companies with continuing exploration and development activities and competent management teams, which will benefit from growing cash-flow and a larger reserve base in a rising oil price environment. These companies are also prime take-over targets for larger industry players looking to further expand their reserve bases, as illustrated by the recent takeover approach for Dana Petroleum.
Without a doubt there are short term risks associated with investing in oil companies, which are closely linked with the volatility in oil prices and the potentially weak equity markets. However, we believe that oil's long term uptrend remains intact.
In both previous super-cycles, supply readily increased to meet higher demand. However, in the present environment, years of low oil prices have resulted in under-investment in exploration and a lack of interest in the sector. Therefore growth in production has not been able to keep up with high levels of demand. It has taken a major financial crisis, with the ensuing drop in output and demand for energy, for production to catch up. For the time being oil prices seem to have stabilised in a trading range between $65 and $85 per barrel.
We do not believe prices will stay in this range for longer than another year. The potentially large deposits of heavy oil in the tar-sands of Canada, as well as the huge recent finds off-shore of Brazil, seem to have a marginal production cost of over $80 per barrel, notwithstanding the significant environmental risks they pose.
Other major fields around the world seem to be in decline and many new finds are too small to make a significant impact. The oil price, therefore, will continue its long-term rising trend and could reach the old highs of $150/barrel over the next two to four years.
Performance over 12-years
Source: Financial Express Analytics
Angelos Damaskos is chief executive officer (CEO) of Sector Investment Managers and fund advisor to Junior Oils Trust. The views above are his alone, and no recommendations are implied.