Brian Singer, head of William Blair’s Dynamic Allocation Strategies team, discussed the key factors driving steady oil prices, whether prices will rise, and if the markets should remain optimistic in a Wall Street Journal “Moneybeat” podcast.
According to Singer, oil-price volatility sparked in August 2015 when China rattled the markets with yuan devaluation. That devaluation made imports of a number of commodities, including crude oil, more expensive. It also raised concerns about the strength of the economy of one of the world’s largest consumer of commodities.
“Oil actually became a real-time proxy for world growth and … more behavioral in nature,” Singer said. “Every time there was a fear of growth it went down, and every time there was an expectation of growth it went up.”
That, Singer said, is no longer the case. World growth expectations are higher and firmer, and China is much less relevant, Supply can be put on and off the market much faster, and inventories are still relatively high and expected to remain that way for the coming quarters.
Singer thinks fair value of oil prices is close to $45, in part because the current quota isn’t as powerful as the market seems to think it is. He noted that it was set well below the current production of all of OPEC, but close to the actual production of the OPEC members that are under the quota. As a result, it is not an astounding change.
Moreover, Singer said, “since the 70s, our observation is it just takes a few months after quota is put in place for the cheating to begin, and we don’t see anything this time that will push it out too much further.”