Oil is about to post its fourth week of gains in a row, and the outlook remains bullish thanks to supply constraints and demand strength. But one hedge fund manager is even more bullish than that.
Doug King, head of the Merchant Commodity Fund, enjoyed record returns last year, gaining 74 percent in 2021 and beating its previous record of 59 percent set in 2014—another boom year for oil right before the bust. But now, King is expecting further gains in the price of oil, saying it could even reach $200 per barrel over the next five years.
“We believe in structural supply-side commodity inflation that most will not have ever seen -- the highest since the 1970s,” King told Bloomberg in an interview, adding, “Only OPEC will react to price metrics and they are undershooting every month.”
OPEC and its OPEC+ partners have been struggling to produce as much as it has agreed to under its production control agreement that came in response to the devastation that the pandemic wrought on the oil market in 2020. Only a few members of the extended cartel have the capacity to boost production in line with quotas while the rest are finding it hard, prompting worry about future oil supply in a strong demand situation.
“In practice, a lot less oil is making its way to the market,” the Merchant Commodity Fund wrote in its investor letter, as quoted by Bloomberg. “Its members are simply unable to return to pre-covid levels of output. This is all down to a lack of investment.”
Russia is a notable example of a producer that is nearing the limit of its available production capacity, the fund’s management also noted in the letter.
What this means for prices is further upward potential, especially if demand continues as strong as it is currently.
By Irina Slav for Oilprice.com
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But I don’t think we will see $200 oil over the next five years unless there is a closure of the Strait of Hormuz for a lengthy stretch of time in an armed conflict involving the United States and Iran or a rapid escalation of tensions between Taiwan and China developing into a military confrontation involving he United States.
Long-term a $200 oil could become a reality when the last barrels of oil produced will most probably come from the Arab Gulf region, Venezuela’s Orinoco Belt and Russia’s Arctic.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London