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Trends in the Oil Market

Sigma Investment Counselors

May 12, 2016

Our Chief Investment Officer, Denise Farkas, and I were at the Chartered Financial Analyst (CFA) Institute’s Annual Conference earlier this week.  We thought that it would be a good idea to share some insight with our readers on trends and changes in the global oil market.

First, the global oil market is experiencing a structural change due to several significant technology advances such as big data, material science, and artificial intelligence.  Big oil companies no longer dominate and technology companies are starting to enter and influence the market.  Increased productivity in onshore drilling and innovation are changing the long term oil price outlook.  Analysts believe oil companies’ operating costs have been reduced by 20-30% due to technological advancement, putting the break-even price for oil in the $40/barrel range or lower.

Second, there are 3 factors challenging conventional wisdom on the endless growth of oil demand: slow growth in China, the trend of world urbanization, and the Paris Climate Agreement, which aims to reduce global greenhouse emissions.

Meanwhile, as has always been the case, war and civil unrest could unpredictably constrain the oil supply.  Restricted supply and uncertainty could cause sudden price hikes.

In the end, we have to keep in mind that fossil fuels are still the primary global energy resource and they are not going away in the near future.  Analysts project that by 2040, oil and gas will still account for 43% of the world’s energy resources.

All comments and suggestions are welcome.

Wenma Gorman, CFA®

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