Oil supply shock set to boost beleaguered energy markets


Mark Lacey

Mark Lacey

Head of Commodities

John Coyle

John Coyle

Fund Manager and Global Sector Specialist

The energy market is setting up for an enormous supply shock through the latter half of 2015 and into 2016, driven by strong demand and shrinking supply.

That means at some point in the not too distant future, equity market players should move from their current extreme bearishness to something less manically depressed.

Oil suppliers responding quicker than expected

The general consensus is that markets are grossly oversupplied, and will remain oversupplied until substantial amounts of current production are forced offline, a process that could take more than 12 months.

We think, however, physical crude markets will be on the turn by mid-2015. This is likely to occur as demand strength comes through in response to lower prices.

We believe we will have irrefutable evidence of a substantial supply response in both the North American shale plays and the North Sea conventional volumes by mid-year.

As these two forces combine the net balance between supply and demand could begin to look very different.

Outlook risks

There are risks to adding exposure to the energy sector:

  • Oil demand may come up short of expectations if we have an emerging market crisis.
  • The Saudis genuinely want a price war and decide to increase production, as opposed to the current strategy of simply talking markets down.
  • US volumes prove more resilient than we expect despite savage cuts to capital expenditure, which would point to prolonged weakness in oil prices.

Time running out to reposition

Weakness in physical crude markets is likely to peak around May/June as inventory piles up in the US and in floating storage facilities.

But we believe the window for closing underweight positions is short and crude prices will be substantially higher than they are today come the end of 2015.

Important information

This communication is marketing material. The views and opinions contained herein are those of the named author(s) on this page, and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds.

This document is intended to be for information purposes only and it is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The material is not intended to provide, and should not be relied on for, accounting, legal or tax advice, or investment recommendations. Information herein is believed to be reliable but Schroder Investment Management Ltd (Schroders) does not warrant its completeness or accuracy.

The data has been sourced by Schroders and should be independently verified before further publication or use. No responsibility can be accepted for error of fact or opinion. This does not exclude or restrict any duty or liability that Schroders has to its customers under the Financial Services and Markets Act 2000 (as amended from time to time) or any other regulatory system. Reliance should not be placed on the views and information in the document when taking individual investment and/or strategic decisions.

Past Performance is not a guide to future performance. The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested.  Exchange rate changes may cause the value of any overseas investments to rise or fall.

Any sectors, securities, regions or countries shown above are for illustrative purposes only and are not to be considered a recommendation to buy or sell.

The forecasts included should not be relied upon, are not guaranteed and are provided only as at the date of issue. Our forecasts are based on our own assumptions which may change. Forecasts and assumptions may be affected by external economic or other factors.

Issued by Schroder Unit Trusts Limited, 1 London Wall Place, London EC2Y 5AU. Registered Number 4191730 England. Authorised and regulated by the Financial Conduct Authority.