By Alec Hogg
Markets tend to over-correct as we witnessed when the crude oil price plunged from over $100 to under $30 between mid-2014 and early 2016. Since then the oil price has rebounded with many pundits forecasting it is on its way back to past glories. Don’t believe it.
The sound economic reason for oil’s plunge hasn’t disappeared. At any price over $40 a barrel, the North American shale gale starts roaring again. In the past year, with prices averaging over $45, frackers have been re-opening mothballed wells at an accelerating rate with shale gas exploration rigs doubling from 248 to 513 and fracked production having risen by 600,000 barrels a day.
The enormous capacity and continued productivity improvements in the US shale gas industry puts a cap of around $60 a barrel on crude oil. In the medium term that will fall still further as other countries with easy to access shale reserves follow suit. So if you’re buying Sasol shares on the hope of another oil-fuelled boom, best to pause.
