Sir Michael Hintze of London-based CQS Investment Management said the “new normal” in the price of oil could last for the next decade due to a structural shift in the dynamics of the oil market. In a new research report cited by The Australian Financial Review, the billionaire founder of global hedge fund CQS said, “There is a major change to the value chain taking place.”
Oil prices: New normal could surpass 2020
According to the new research report, Hintze said that the “new normal” in crude prices could surpass 2020 due to structural shifts in oil market dynamics. He indicated that technology and geopolitics will be the core drivers of this prolonged price suppression of oil to near $50 per barrel.
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The founder of CQS Investment Management said: “This time around there are reasons to believe the decline is structural due to the changes to the market brought about by fracking and Saudi Arabia no longer being willing or able to act as a swing producer.”
While sharing his thoughts on the impact of low oil prices on the global economy in the near future, he said in his interview with CNBC last month: “A persistently low oil price could affect producers’ ability to maintain domestic infrastructure and in the medium term be a force for geopolitical instability.” He added: “One should not underestimate the potential impact of such a sharp fall on regional economies and companies.”
Saudi’s fiscal balance assumed a $90 oil price
In the research report, Hintze said while most producers can cover their marginal costs at around $50 a barrel, national fiscal balances require higher prices to keep the books balanced. He elaborated that while the Saudi marginal cost of production was around $10 a barrel, its fiscal balances assumed a $90 oil price for this fiscal year and sets the break-even price at just over $100 given its current spending program.
As cited by ValueWalk, in the latest CQS Insights publication sent to investors, Hintze said the nearly 40% drop in oil prices over the last six months should be economically supportive in the medium term.
In a year-end note to investors, Hintze said his biggest fear for investment markets next year remained the “contagion risk of a geopolitically significant event” and that the oil price rout and sustainability of the Eurozone were the most recent “potholes that could be the trigger.”
In his letter, Hintze also indicated that in the short term, the biggest effect will be on indebted oil-producing countries. However, he cautioned, “One should not underestimate the potential impact of such a sharp fall on regional economies and companies.”