The violent speed at which the oil price has dropped has shocked equity markets around the world but relief could be just around the corner.
Fairfax media yesterday quoted Investec, a South African investment bank, as saying that it expected the oil price to average between US$70 and US$75 a barrel this year. Given that Brent oil, the global benchmark, is currently trading at just US$48.76 a barrel, that would suggest we're in for a very sharp recovery in the near future.
Iraq has also given an optimistic view on the current oil crisis, predicting that "prices have reached the bottom" after having fallen nearly 60% in just seven months to a near six-year low. Indeed, spending by producers could be significantly reduced as a result of the low prices (just as BHP Billion Limited (ASX: BHP) announced yesterday), while hundreds of drilling rigs are also likely to be closed. This would help to reduce the market's oversupply problem and would likely support prices.
That would be fantastic news for companies in the energy sector which have watched their shares plummet. While smaller players such as Senex Energy Ltd (ASX: SXY) and Sundance Energy Australia Ltd (ASX: SEA) have crumbled along with the commodity, the bigger producers, being BHP Billiton, Woodside Petroleum Limited (ASX: WPL), Santos Ltd (ASX: STO) and Oil Search Limited (ASX: OSH) have also been hit hard.
However, it's anyone's guess as to whether a rebound would last, or if one is even around the corner. Key producer Iran has recently stated that it expects prices to drop to US$25 a barrel before prices rebound, indicating there could be plenty more pain left in store. The problem is, while many nations are calling for a cut in global output, no country is willing to make the sacrifice themselves. Even if American shale production did decrease, other producers around the world could increase theirs which would only exacerbate the glut.
As tempting as it may be to try pick up a bargain in the sector before prices rise again, there truly is no way of knowing when the crisis will end. Investors ought to wait for the volatility in the sector to subside before making their move.
