Brenda Vingiello, Sand Hill’s Chief Investment Officer, joined Squawk Box to discuss her thoughts on the latest market trends and market outlook for 2025. This
How Low Can Oil Go?
Published Date : February 10, 2015
Oil finished 2014 down a massive 46% – making it the worst performing asset class of 2014. In The Wall Street Journal’s January 2014 economic forecasting survey, economists predicted oil would finish the year at approximately $95 a barrel, up from about $92 at the beginning of the year. But – as we saw very clearly– economists can be wrong. Crude prices not only nearly halved by year-end, the selling didn’t stop then. Investors headed into 2015 with prices dipping below $50 a barrel and hitting 5-year historic lows.
The enormous and unexpected decline in prices is due to a perfect storm of factors. On the supply side, advancements in technology led North America to become the largest producer of oil, resulting in the strongest non-OPEC supply in over 30 years. While America doesn’t export, it now imports much less, creating a glut of extra supply globally. In November, OPEC also announced they plan to maintain current production despite falling prices – a decision not seen since 1986. In addition, geopolitical risk decreased significantly as turmoil in two big oil producers (Iraq and Libya) did not affect their output. On the demand side, we saw the second lowest Chinese oil consumption since 1990, the warmest weather on record across Europe, and huge negative demand revisions in Russia, Ukraine, Syria, Iraq and Japan. The result was a colossal crash in the price of crude.
The question everyone is asking is: how low can oil go? One important metric is the breakeven cost of production. While this point varies widely from basin to basin and project to project, the general consensus seems to be that the average lies in the $50-70 range, leading some to believe we’re close to a floor. Perhaps a more relevant breakeven point is that at which OPEC nations are able to balance their national budgets from income and taxes. According to the Economist, all OPEC nations require oil above $70 to be able to do so, but some have the ability to endure lower prices for a period of time thanks to copious cash reserves. While Saudi Arabia can tolerate cheap oil for quite some time, eventually they require oil above $90 to stop draining their reserves. Taking another tack, if we look to history as a guide, the black gold briefly dropped below $40 a barrel during the 2008 financial crisis before it began its ascent.
All this is to say that the answer is one that no one wants to hear: it is truly impossible to know how low oil can go and how long low prices can be sustained. What we do believe is that current levels cannot persist over the medium to long-term and now represent an excellent buying opportunity for long-term investors able to withstand potential future volatility in prices. At Sand Hill, we seek to be long-term and contrarian, taking advantage of opportunities such as this to add value for our clients over time.
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All video presentations discuss certain investment products and/or securities and are being provided for informational purposes only, and should not be considered, and is not, investment, financial planning, tax or legal advice; nor is it a recommendation to buy or sell any securities. Investing in securities involves varying degrees of risk, and there can be no assurance that any specific investment will be profitable or suitable for a particular client’s financial situation or risk tolerance. Past performance is not a guarantee of future returns. Individual performance results will vary. The opinions expressed in the video reflect Sand Hill Global Advisor’s (“SHGA”) or Brenda Vingiello’s (as applicable) views as of the date of the video. Such views are subject to change at any point without notice. Any comments, opinions, or recommendations made by any host or other guest not affiliated with SHGA in this video do not necessarily reflect the views of SHGA, and non-SHGA persons appearing in this video do not fall under the supervisory purview of SHGA. You should not treat any opinion expressed by SHGA or Ms. Vingiello as a specific inducement to make a particular investment or follow a particular strategy, but only as an expression of general opinion. Nothing presented herein is or is intended to constitute investment advice, and no investment decision should be made based solely on any information provided on this video. There is a risk of loss from an investment in securities, including the risk of loss of principal. Neither SHGA nor Ms. Vingiello guarantees any specific outcome or profit. Any forward-looking statements or forecasts contained in the video are based on assumptions and actual results may vary from any such statements or forecasts. SHGA or one of its employees may have a position in the securities discussed and may purchase or sell such securities from time to time. Some of the information in this video has been obtained from third party sources. While SHGA believes such third-party information is reliable, SHGA does not guarantee its accuracy, timeliness or completeness. SHGA encourages you to consult with a professional financial advisor prior to making any investment decision.
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