The recovery in oil prices has begun, and energy equities are attractive now, BlackRock’s managing director and portfolio manager for the natural resources team said.
Global demand for oil is still growing, although at a slower pace, Robin Batchelor said Tuesday at a press briefing in Hong Kong.
Oversupply will be eased, as the United States is expected to reach peak crude oil output in the second quarter of this year, he said.
Batchelor expects oil prices to rise to between US$60 and US$70 per barrel by the end of the year.
On the corporate level, the increasing cost of production has been an issue for several years, leading to energy equities underperforming the overall market, even during the period when oil prices hovered around US$100.
Now, after the slump in prices, Batchelor said, “companies are forced to take action to improve margin by reducing the cost base, so I think the next phase in this market will be about companies improving their returns, even through the price is low”.
Higher oil prices expected later this year will likely have a positive impact, he said.
In the long run, Batchelor said, prices need to move up to a point that incentivizes enough production to offset the natural rate of decline of output in existing projects.
He said the rate is about 4-5 percent every year, which means that, without additional investments in existing production bases, oil output will decrease by one-third in 2020 from the 2014 level.
The price could be about US$70-US$80 per barrel in the long run, Batchelor said.
The portfolio manager said he has been gradually adding more oil-price-sensitive assets to the energy fund by taking out money from large and very defensive companies and putting them into medium-sized and even small firms that have more leverage to the oil price, because he believes the price of oil is bottoming.
Alastair Bishop, a director and portfolio manager covering the energy sector at BlackRock, said the firm has noticed very large inflows into energy funds this year.
Investors typically inject more money into energy funds when the oil price is recovering, he said.
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