Long-term oil price rally a pipe dream – WisdomTree

Added 29th November 2016

WisdomTree research analyst Nick Leung has cautioned investors against the widespread optimism on a sustained oil price rally, suggesting the long-term pain of lower prices could continue.

Long-term oil price rally a pipe dream – WisdomTree

Ahead of the eagerly anticipated Organization of the Petroleum Exporting Countries meeting in Vienna on Wednesday, many investors have adopted a cheerier outlook on oil price expectations.

Though delegates from the 14-member group appeared to have ended Monday’s discussion on a good note, Tuesday’s negotiations were considerably more turbulent, with a stand-off between petroleum heavy hitters, Saudi Arabia and Iran. In turn, the price of Brent crude oil toppled and was down 3.6% to $46.49 per barrel at the time of writing.

While Leung believes that the group’s desire for self-preservation will ensure an agreement is reached, he thinks markets and investors are being unrealistic about the likelihood of an oil price rally.

“Arguably the biggest stumbling block to higher oil prices longer term lies with the willingness of Iran and Iraq to adhere to any supply cut agreements,” he said. “Iran, looking to reclaim lost market share following years of trade embargoes and isolation, and Iraq, heavily reliant on oil revenues to fund its fight against ISIS, maintain strong incentives to defer from production cuts.”

But the prospect of offering concessions to Iran and Iraq leads to a damned if you do, damned if you don’t scenario for Saudi Arabia, the cartel’s largest producer, which would have to shoulder the burden of Iran’s and Iraq’s extra production cuts, said Leung. “Unless concessions are offered, Iran and Iraq will continue to avoid committing to any deals, undermining negotiation efforts and signaling a return to the status quo of high output, low prices and continued fiscal pain.”

“At the same time, any concessions offered will not only blunt the effectiveness of a supply cut, since the two are the second and third largest oil producers within the bloc, but also set a dangerous precedent that could encourage other OPEC members to cheat. Therefore, the immediate success of any agreement hinges upon an amicable solution emerging.”

And if an ‘amicable’ output agreement is reached by OPEC’s members, the threat of US shale oil still exists, Leung stressed.

“Any supply void left by OPEC will likely encourage nimbler US shale oil producers to start pumping again; their efficient production techniques enabling them to produce at much lower costs,” he explained. “US oil rigs take approximately four months to adjust to higher (or lower) oil prices. This implies that any supply cut will only provide a temporary boost to prices, before attracting other producers to commence operations again and limiting OPEC’s advantage from higher prices.”

President-elect Donald Trump’s move toward US energy independence could also put a damper on OPEC’s attempts to bolster flagging oil prices. While Trump’s energy policy remains ill-defined, like most of his other proposals to date, it is not unreasonable to assume it will involve opening federal land for oil and gas production, Leung stated. Years of this ramped up domestic production would strain oil prices further.

Although the Vienna meeting has the potential to “correct the persistent supply gut,” ultimately supply side dynamics will continue to dictate the strength of pricing pressures, according to Leung. “The balance in oil markets remains delicate with global demand still lackluster and not expected to accelerate in the near future,” he said.

Kames Income Hub


Vincent McEntegart, manager of the Kames Diversified Monthly Income Fund, explains how he aims to deliver a stable and sustainable income of 5% p.a.*, paid monthly, by investing in a range of asset classes

Square Mile Research

Premier Multi Asset Global Growth - Alex Farlow
Premier Multi Asset Global...

Talking Factsheets is a video service for users...

Visitor's Comments Add your comment

Add Your Comment

We won't publish your address

About Author

Kristen McGachey

Senior Reporter

Kristen joined Last Word Media and the world of financial journalism in April 2016, leaving behind a career in a legal publishing firm as a senior researcher turned assistant editor.

This native Angelino initially moved to the UK in 2008 to complete her undergraduate studies at the University of Nottingham. She subsequently obtained a Masters degree in Philosophy with Literature from the University of Warwick.



Investment Strategy




PA Edinburgh 2017
PA Edinburgh 2017

Thursday 7 September
Balmoral Hotel, Edinburgh

PA Alternatives 2017
PA Alternatives 2017

Tuesday 12 September
Sofitel St James, London  

PA Dublin October 2017
PA Dublin October 2017

Tuesday 10 October
Westbury Hotel, Dublin

PA US 2017
PA US 2017

Tuesday 17 October
Furniture Makers' Hall