We do not focus on purposely forecasting commodity cycles. The goal of the assumptions we make is to be approximately right or precisely wrong. We view the crude oil market as oversupplied by 1.5 million barrels per day. With the Saudis’ unwillingness to cut production to balance the market, that leaves the responsibility of balancing the supply side of the market on the shoulders of North American producers, who we are not expected to rebalance the market overnight because of their propensity to spend excess cash.
Read Davidson’s full Q2 2015 CIO Insight: Sorting Through the Value of Energy
Assuming that exploration and production (E&P) company cash flows are down in the 30-40% range for 2015, there is an associated lower level of investment that should slow oil production growth in 2015 and early 2016. Under reasonable demand assumptions, we think this leads to a more balanced market outlook. On the gas side, we see demand accelerating a bit from here but there is plenty of pent-up supply that should keep a lid on prices over the next few years.
The opinions expressed are those of Phillip N. Davidson, CFA, and are no guarantee of the future performance of any American Century Investments portfolio.
For educational use only. This information is not intended to serve as investment advice.