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Why oil will not rebound to USD100 any time soon

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Oil prices are set to remain in and around their current range for an extended period, with predictions of rebounds back to triple-digit territory wide of the mark, according to Kames Capital’s Chief Investment Officer Stephen Jones (pictured).

Brent crude bounced back to almost USD68 per barrel by the beginning of May this year, while WTI followed a similar path, hitting a high above USD61 by early June. This prompted some to suggest the commodity will eventually hit USD100 – a level last seen in September 2014 – but both have since fallen back recently below USD58 and USD53 respectively, erasing year-to-date gains.
 
Jones believes ongoing pressure from the dollar, an increasing pipeline of supply, and a lack of global demand will keep it pegged back.
 
“Oil in triple digits will be a distant memory,” he says. “Although the commodity bounced off previous lows, that was to be expected given it had halved in value over the course of the last year, and the simple fact is the asset class remains challenged.
 
“Despite bottoming earlier this year and staging some form of recovery, the fundamentals remain the same for oil. The rig count in the US is now rising again, new pipelines of supply are set to come on stream, and there is a lack of growth globally which is keeping demand subdued.”
 
Jones said events in Greece and China – with the former struggling to stay in the eurozone and the latter dealing with a slowing of its growth rate – are also keeping a lid on energy prices in general, along with improvements in how oil is ultimately used by consumers.
 
“With two major consumers of commodities – Europe and China – both experiencing a slowdown in growth, and oil also being used more and more efficiently, headwinds remain,” he said.
 
“Therefore, this equilibrium price between USD40-USD65 looks likely to last for some time, meaning oil does not represent a compelling investment opportunity,” he said.
 
It is not just oil which remains challenged. Jones said other hard commodities – such as iron ore – remain under pressure from an abundance of supply.
 
“Iron ore has endured another brutal period in July, snuffing out its recent rebound, and if you look at our equity portfolios we remain short the miners,” he says. “As with oil, supply is well ahead of demand, and indeed many investors are currently using these types of stocks as a source of funding for other opportunities, so we are underweight commodity companies within equity markets, as well as avoiding them on a top down view.”
 

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