IEA forecast raises questions for global resources investors, says Sector Investment’s Angelos Damaskos
Angelos Damaskos, CEO of Sector Investment Managers, assesses the impact on investors of the International Energy Agency’s latest forecasts for US domestic oil and gas production.
The International Energy Agency (IEA) forecast this month that the US is set to overtake Saudi Arabia and Russia as the world’s largest global oil producer in the second half of this decade, and to become self-sufficient by 2035.
New extraction techniques have unlocked huge hydrocarbon resources and have, this year, depressed gas prices close to 20-year lows. This reversal in oil trading may impact on its price, as well as energy geopolitics.
However, the IEA also acknowledged that the US oil boom is still in its infancy, pointing in particular to the effect a drop in domestic oil prices would have as many of the techniques are expensive and require high market prices to be economically viable.
We believe the market has already priced in the prospect of US energy independence.
While there is a potential for decline in US imports, Europe and Asia import levels are increasing again and show early signs of recovery. In Asia imports continue to grow due to its ongoing industrialisation and in the Middle East, Africa and Latin America exports are declining as resources are consumed domestically in line with the raised standards of living. The growth in domestic demand in the emerging markets has offset the lessening demand from the US.
Shares in smaller oil companies are trading at near five-year lows and those of earlier stage development are ignored by investors, however, the outlook for the price of oil remains strong. Markets may remain irrational and decoupled from fundamentals for a while longer, but fair value will be recognised resulting in a re rating of small cap resources stocks.