Oil will reach as high as $100 in the second half of next year as demand strengthens and supply falls short of forecasts, according to a fund manager who’s worked in the industry for more than three decades.
Demand will exceed supply by about 1 million barrels a day by the end of this year and a shortfall will persist into 2016, Charles Whall, who manages about $1 billion of assets in energy equity funds at Investec Asset Management in London, said by phone Wednesday. Oil probably will reach a range of $90 to $100 in the second half of next year, he said.
Saudi Arabia, the biggest oil exporter, is leading OPEC in a strategy of defending market share rather than prices and is pumping the most crude in about three decades. While Citigroup Inc. and Goldman Sachs Group Inc. say the nation will keep raising output, Whall says the limit may already have been hit.
“The general picture could be quite wrong,” said Whall, whose funds have an “overweight” position on exploration and production companies, particularly in North America. “This looks like a much tighter market next year than people are anticipating.”
Brent crude, a global benchmark, rallied 40 percent to $63 a barrel since reaching a six-year low on Jan. 13. Prices could reach $80 by the end of the year, Whall said. They will average $85 next year, according to Investec’s base case.
Saudi Arabia has been supplanted by Russia as the top supplier to China and that indicates the nation is already at its sustainable output peak, according to Whall.
“They’ve got a battle for market share at the moment,” Whall said of Saudi Arabia. “The Russians are now selling more crude than they’ve ever done to the Chinese. So if they could produce more, of course they would.”
Saudi Oil Minister Ali Al-Naimi said June 18 that output can rise to meet demand and that his nation retains spare daily production capacity of as much as 2 million barrels.
Traders also should be more conservative in their assumptions about how much extra supply will come from Iran, Whall said. The nation’s output was declining before sanctions were imposed, he said.
Iranian Oil Minister Bijan Namdar Zanganeh said June 5 that his country could increase production by 1 million barrels a day within about six months of a deal to lift sanctions. It might actually add only 400,000 barrels a day next year in the event of a deal with world powers over its nuclear program, Whall said.
Falling oil prices have also cut spending across the industry and that will curb future production plans, Whall said. Even if prices rise and U.S. drillers activate more rigs as a consequence, it will take time for that to translate into higher output, he said.