A motorist is silhouetted as he pumps fuel into his vehicle at a BP station in Flint, Michigan, US. Oil prices have slid to an 11-year low as Opec reiterated its policy of defending market share by effectively abandoning output limits at a December 4 meeting.
Bloomberg
London
Investors should expect more volatility in oil markets and energy-related stocks next year, before a rebalancing takes place over the next 12 to 24 months, according to a BlackRock Inc fund manager.
“We expect continued volatility as this rebalancing process plays out,” Alastair Bishop, a London-based director who oversees BlackRock’s $1.8bn World Energy Fund, said in a phone interview. Oil prices are unsustainable and too low to foster investments in the industry, he said.
Oil prices have slid to an 11-year low as Opec reiterated its policy of defending market share by effectively abandoning output limits at a December 4 meeting. While BlackRock, the world’s biggest asset manager, was correct in predicting a U-shaped rather than a V-shaped recovery, the rebound is more “elongated” than anticipated, Bishop said.
“What we didn’t anticipate is that Opec would have added as much production this year as they’ve done,” Bishop said. “Iraq in particular, we were not anticipating their ability to de- bottleneck and therefore raise production as successfully as they managed.”
Iraqi oil production hit a record of 4.4mn bpd in June and currently stands at around 4.3mn barrels. Output has surged by 40% since June 2014, when Islamic State militants started making territorial headway in the country.
Bishop also cited Iran’s potential return to the markets next year as an additional cause of volatility. Sanctions over its nuclear programme are expected to be lifted in the first quarter of 2016, adding more barrels to an already oversupplied market.
The collapse in prices has forced oil companies to postpone or cancel costly investment projects, lay off workers, sell assets and even sometimes cut what are considered to be sacrosanct dividends in a bid to conserve cash. Spending has been cut by $250bn this year, according to energy consultants Rystad Energy and a further $70bn is at risk next year, it said.
The MSCI World Energy Sector Index, which includes 107 energy companies, has lost more than a quarter of its value since the start of the year. The MSCI World Index has fallen by 4.3% over that same period.
“Volatility in the macro would translate into volatility in the equities,” Bishop said. “When we talk to our investors, we’re saying you need to be prepared to stomach continued volatility for a period.” While most oil majors have pledged to do whatever they can to maintain dividends despite the slide in their shares, Italy’s Eni cut its payout this year.
“The equity markets are clearly suggesting there’s a risk to these dividends, hence why companies like BP and Shell have yields as high as they are,” Bishop said. “It’s not something that keeps us up at night.” Bishop also expects more consolidation in the industry next year. “We would anticipate that there will be more M&A as we go through this down cycle,” he said.
