Opinion: Fund manager who’s been right on oil has a depressing new prediction

T. Rowe Price New Era’s Shawn Driscoll says the price for a barrel of oil could drop into the teens

Reuters

By

HowardGold

Columnist

In November 2014, Shawn Driscoll, manager of the natural-resource-focused T. Rowe Price New Era Fund, told me he expected crude oil prices, then in the $80s-per-barrel range, to fall into the $50s within 10 years.

Ten weeks later, with crude in the $50s, I interviewed him again and he predicted crude would drop into the $30s.

This week, when oil was trading in the low $30s, I caught up with him once more. And if you’re looking for a so-called tradeable bottom in energy markets soon, you’re going to be disappointed.

Although Driscoll thinks crude oil will slip into the low- to mid-$20s within six months — at around $29.50 in late-Friday-afternoon NYMEX trading, we’re not far from that now — it ultimately could go lower as we spend the next decade digging out of a secular bear market in commodities and oil.
Why? Oil’s oversupply is profound and will last for at least two years, he said, and too many industry people still are in denial.

Another take: Why oil could plunge to $20 a barrel, but probably not $10
 
The oversupply, of course, stems from Saudi Arabia’s efforts to keep pumping to preserve market share from U.S. shale producers and other countries like Russia and Iran, which is chomping at the bit to free itself from international sanctions so it can pump oil again — at any price.

Commodities secular bear markets go on for years, fund manager Shawn Driscoll said — the last one took about 18 — and we’re only in the early stages of this one.

Given current demand — and without new Iranian production — “our model is saying we’re still oversupplied a million barrels a day in ’16,” said the manager of the $2.7 billion New Era mutual fund PRNEX, -2.31% “Our model for ’17 still shows oversupply with above-trend-line demand and without Iran.”

And the oversupply may be even worse than traders and investors acknowledge, because hundreds of thousands of barrels a day of new production are coming online in places like Brazil and Kazakhstan over the next couple of years.

“The piece that’s most overlooked by market participants … is the long-tailed projects, deepwater projects that take three to five years to come online. Those projects are still coming,” he told me. “There were decisions made in 2013 and 2014, the echo of those projects is still coming online this year and next year. 2018 is the first year you don’t see a lot of those projects coming.”

But despite massive production cutbacks, tens of billions of dollars in reduced investment and 250,000 layoffs and counting in the global energy industry, Driscoll sees, if not complacency, then a lack of fear among energy investors and decision makers.

“Over the last few weeks, we’ve had several meetings [with producers] and there’s just no panic,” he told me. “I would have said at $30 we ought to start seeing that.”

“I can’t get over how many people, CNBC, for example, ushers before the camera to say oil’s bottoming. This is not the psychology I would expect at $30 oil. There’s an endless amount of people who want to call the bottom,” he continued. “There’s not enough fatigue — investor fatigue, management fatigue.”

Read: Shale billionaire says oil to rebound to $60 a barrel by year-end
 

Is it denial? “With some people, it may be denial,” he replied. “No one wants to look like a fool where they do something drastic at the bottom. I think that’s part of the psychology.”

In fact, he said, “we’ve been thinking for a while that there’s a perverse incentive to keep drilling even while prices are falling … particularly when you’re sitting on a lot of debt.”

What could cause producers to throw in the towel? A major bankruptcy or series of bankruptcies of deeply indebted energy companies, which becomes more and more likely as prices drop. 


“We [think] you need to see a credit calamity and/or we need to see very low oil prices to rationalize supply. We’ve certainly seen some credit pain, but we don’t think it’s over,” he said. “I think the next three to six months are going to feel like our ’08-’09 again. I think the calamity in credit is going to be bad.”

That’s bad news for oil prices, too. While Driscoll thinks crude may fall into the $20s over the next six months — not a big drop from here — he doesn’t think that’s the ultimate bottom.

Commodities secular bear markets go on for years, he said — the last one took about 18 — and we’re only in the early stages of this one. Oil prices could drop into the teens over the next decade, he said.
What could get us there sooner? “If the high-yield market goes off the rails, we may hit our sub-$20 number then,” he told me.

But more likely than a dramatic bottom and then a big rebound, we’re facing years of churning and pain.

“It’s not fun being bearish,” Driscoll said.

No, it isn’t. But given his track record and the precarious state of the oil market, bearishness on oil may well be the reality we just can’t ignore.

Howard R. Gold is a MarketWatch columnist and founder and editor of GoldenEgg Investing, which offers exclusive market commentary and simple, low-cost, low-risk retirement investing plans. Follow him on Twitter @howardrgold.