Just as fresh supply concerns continue to keep global oil prices lower, one investment strategist is going where few are prepared to, and is calling a slow and steady rebound in the liquid commodity.
Vadim Zlotnikov, chief market strategist at global asset manager AllianceBernstein, thinks oil prices are likely to stay low for longer and start to gradually recover in as little as six months time.
Separately in a report overnight from London, OPEC secretary general Abdulla al-Badri said he thinks prices at current levels may have reached a floor and could move higher very soon. He also warned of a risk of a future price spike to $US200 a barrel if investment in new supply capacity were too low.
Zlotnikov's report comes as new data shows global hedge funds increased positions last week in the price of West Texas Intermediate oil slipping even lower, according to the US Commodity futures Trading Commission.
Crude oil supplies out of the US rose by 10.1 million barrels in the week ended January 16, putting the country on course to pumping the most oil since 1972, Bloomberg quoted US Energy Information as saying.
The price of Brent oil, which is regarded as the most widely used international benchmark for crude contracts, has more than halved since July. On Tuesday, it was trading at $US48.72 a barrel, down 0.14 per cent from Monday. West Texas Intermediate oil added 0.37 per cent to $US45.76 a barrel.
"We're likely more than halfway through this oil decline, and prices should rebound in six to nine months, said Mr Zlotnikov in a recent note to clients.
"If the price of West Texas Intermediate crude remains below $50 per barrel, we'll see dramatic cutbacks in oil investment and credit flows, and funds will be diverted from exploration to mergers and acquisitions.
"Lost capacity could approach the 3.5 million barrels per day that's the current estimate of OPEC's spare capacity. A global economic slowdown, if it occurs, could extend the time horizon for a price rebound, while heightened geopolitical issues or financial pressures could shorten the recovery period," said Mr Zlotnikov.
Like any investment, it's near impossible to predict with certainty where oil prices are headed, but what we do know is that the forces weighing on pricing are showing no sign of letting up.
Major oil producers such as Russia, the Organisation of the Petroleum Exporting Countries (OPEC), and the US, are continuing to increase oil export despite there already being too much supply in the global market which is weighing on prices.
Technology innovations and bigger capital expenditure programs has increased the abilities of exporters to increase production for the time being at least without having disasterous financial consequences.
But as Mr Zlotnikov notes in his report, time could be running out for many countries.
"The Middle East, Russia and Venezuela, have used oil revenues to support spending on fiscal and/or social programs. When oil prices are below $US100 a barrel, and they're well below that now, most of these oil-producing countries run significant fiscal deficits, and when prices are below the $US60- to $US70-per-barrel range, they're also running trade deficits. This forces them to raid official reserves and issue more debt to plug the gaps—not an ideal long-term strategy."
There were hopes that the death of Saudi Arabian King Abdullah would prompt OPEC's bigger exporting member to curtail its output and quit what seems to be a focus on buckling US shale producers, but a quick appointment of a new King Salman suggests that there will be little change in strategy.
At the same time what investment experts are able to give greater clarity on is which sectors are likely to perform best if oil prices do keep falling or rebound.
AllianceBernstein's multi-asset team is banking on a strategy where it is no longer overweight in shares or the US dollar, but is adding Treasury Inflation Protected Securities (TIPS) and is currently rebalancing its commodities exposures.
TIPS are a fixed income investment which is indexed to or designed to keep pace with inflation in order to protect investors from the negative effects of inflation.
That is based on the view that lower oil prices are here to stay for some time yet.
"When you're selecting equities to capitalize on lower oil prices, don't overthink it! If you think oil is heading much lower, short energy, commodities and industrials. If you think we're close to the bottom, simply reverse the trade," said Mr Zlotnikov.
As many economists have noted, history has shown that since 1979, most of the collapses in global oil prices have been triggered by geopolitical risks such as wars or slowing growth. But the 1986 price decline was also linked to a production increase like that which we are seeing now.
Regardless, Mr Zlotnikov added that most oil declines similar to the current slide were generally over in less than a year, and were followed by price recoveries that averaged 32 per cent.
