Evaluating the outlook for oil

Amid broader market volatility, oil prices have proven to be especially sensitive to fluctuations in both currency markets and persistent fears around China and its implications for global growth. This has amplified market reactions to otherwise insignificant oil market data such as small inventory movements, anecdotal supply indicators, and seasonal demand forces.
Morgans Financial Limited

Morgans Financial Limited

This is against a backdrop of a small but so far <1% surplus in aggregate supply versus resilient demand. Initial signs of falling non-OPEC production and a willingness from OPEC to engage other producers have (so far) done little to support volatile oil prices. However we do take comfort from the fact that the cumulative effect of supply responses (which we now see occurring) typically take time to build and is the strongest fundamental driver for an eventual recovery in oil.  

While the fundamental picture is not diabolical, short-term factors such as the resilience of US shale (until now), looming Iran exports and a stubborn Saudi Arabia have combined to sustain selling pressure across oil markets at a time of heightened uncertainty. However it is not all ‘doom and gloom’, with an absence of fundamental drivers behind the collapse in oil prices leaving the downtrend susceptible to a quick reversal in sentiment toward commodities. In our view, current conditions continue to present a unique once-in-a-cycle opportunity for long-term value invest capable of tolerating short-term volatility. We retain our preference for high conviction stock BHP and Oil Search for exposure to the eventual recovery. 

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Morgans Financial Limited
Morgans Financial Limited
Morgans Financial Limited

Morgans is Australia's largest national full-service retail stockbroking and wealth management network with over 240,000 client accounts, 500 authorised representatives and 950 employees operating from offices in all states and territories.

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