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The research team at Lazard Asset Management in New York has put together a concise report on the current state of the oil market and investment implications of a lower oil price.

In my opinion, this piece does a great job of cutting through all the noise in the financial media about the topic. The analysis points to slowing global demand, increased North American supply, and changes in Saudi Arabia’s priorities as the main reasons behind the rapid descent in oil, and highlights the potential fallout from the decline. To quote the report:

“In the near term, absent a real production cut from OPEC and/or Russia, there is no clear backstop for oil prices. Importantly, markets are still well above cash production costs, the point at which oil producers shut down because they are unprofitable. We do not expect North American production will be reduced meaningfully unless prices move closer to $45/bbl. Nonetheless, lower prices will result in sharply lower cash flows, forcing greater capital discipline, as well as lower spending and drilling. Over the near-term, production growth will slow or even reverse. However, in the long run, supply and demand in oil markets is generally self-correcting.”

The paper Lazard Insights: The Evolving Global Oil Market is available online along with the accompanying presentation by Peter Hunsberger and Eugene Krishnan.

 

Tom McCullough

Tom McCullough

Tom McCullough is Chairman and CEO of Northwood Family Office, which looks after the investments and integrated financial affairs of wealthy families with $10 million or more. He teaches ‘The Management of Private Wealth’ in the MBA program at the University of Toronto’s Rotman School of Management, and is also co-author of the books, Family Wealth Management and Wealth of Wisdom: The Top 50 Questions Wealthy Families Ask.

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