LONDON (Bloomberg) -- Oil is trading near $50 again, OPEC seems to be losing its ability to influence prices and a wave of new supply is hitting the market from Texas to Libya. For some, there’s never been a better time to buy.
Despite last week’s selloff, the global oil market is rebalancing rapidly, said Jeffrey Currie, head of commodities research at Goldman Sachs Group. If OPEC extends its cuts into the second half -- as the group has signaled -- demand will significantly exceed production, according to the IEA’s Head of Oil Industry and Markets, Neil Atkinson.
“Do I want to be long oil? The answer is absolutely yes because we are going into a deficit market,” Currie said at the S&P Global Platts Global Crude Summit in London on Wednesday. “With demand continuing to surprise to the upside,” the global supply deficit may be as wide as 2 MMbpd by July, he said.
Brent crude, the international benchmark, fell to a five month low of $46.64/bbl last week amid doubts about the effectiveness of OPEC and Russia’s joint supply curbs. Subsequent signals from Saudi Arabia and Moscow that they could extend cuts into 2018 failed to trigger much of a price recovery. While the resurgence in U.S. shale oil continues to cause doubts about whether the three-year supply glut really is over, banks including Goldman and Citigroup say markets are nevertheless tightening and prices are poised to rise again.
The bulls got some powerful backing on Wednesday from the most keenly watched data on the market -- the U.S. Department of Energy’s weekly report on crude stockpiles. The nation’s inventories fell by 5.2 MMbbl last week, the biggest reduction this year.
WTI rallied 3.2% after the data release on Wednesday and gained another 1.4% to $47.97/bbl in London.
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Headline crude prices for the week beginning 11 March 2019 – Brent: US$66/b; WTI: US$56/b
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In 2017, Norway’s Government Pension Fund Global – also known as the Oil Fund – proposed a complete divestment of oil and gas shares from its massive portfolio. Last week, the Norwegian government partially approved that request, allowing the Fund to exclude 134 upstream companies from the wealth fund. Players like Anadarko Petroleum, Chesapeake Energy, CNOOC, Premier Oil, Soco International and Tullow Oil will now no longer receive any investment from the Fund. That might seem like an inconsequential move, but it isn’t. With over US$1 trillion in assets – the Fund is the largest sovereign wealth fund in the world – it is a major market-shifting move.
Estimates suggest that the government directive will require the Oil Fund to sell some US$7.5 billion in stocks over an undefined period. Shares in the affected companies plunged after the announcement. The reaction is understandable. The Oil Fund holds over 1.3% of all global stocks and shares, including 2.3% of all European stocks. It holds stakes as large as of 2.4% of Royal Dutch Shell and 2.3% of BP, and has long been seen as a major investor and stabilising force in the energy sector.
It is this impression that the Fund is trying to change. Established in 1990 to invest surplus revenues of the booming Norwegian petroleum sector, prudent management has seen its value grow to some US$200,000 per Norwegian citizen today. Its value exceeds all other sovereign wealth funds, including those of China and Singapore. Energy shares – specifically oil and gas firms – have long been a major target for investment due to high returns and bumper dividends. But in 2017, the Fund recommended phasing out oil exploration from its ‘investment universe’. At the time, this was interpreted as yielding to pressure from environmental lobbies, but the Fund has made it clear that the move is for economic reasons.
Put simply, the Fund wants to move away from ‘putting all its eggs in one basket’. Income from Norway’s vast upstream industry – it is the largest producing country in Western Europe – funds the country’s welfare state and pays into the Fund. It has ethical standards – avoiding, for example, investment in tobacco firms – but has concluded that devoting a significant amount of its assets to oil and gas savings presents a double risk. During the good times, when crude prices are high and energy stocks booming, it is a boon. But during a downturn or a crash, it is a major risk. With typical Scandinavian restraint and prudence, the Fund has decided that it is best to minimise that risk by pouring its money into areas that run counter-cyclical to the energy industry.
However, the retreat is just partial. Exempt from the divestment will be oil and gas firms with significant renewable energy divisions – which include supermajors like Shell, BP and Total. This is touted as allowing the Fund to ride the crest of the renewable energy wave, but also manages to neatly fit into the image that Norway wants to project: balancing a major industry with being a responsible environmental steward. It’s the same reason why Equinor – in which the Fund holds a 67% stake – changed its name from Statoil, to project a broader spectrum of business away from oil into emerging energies like wind and solar. Because, as the Fund’s objective states, one day the oil will run out. But its value will carry on for future generations.
The Norway Oil Fund in a Nutshell