Oil dips below $50 amid “game of chicken”

Desert oil pumps1Brent crude oil prices fell below $50 a barrel for the first time since 2009 as fund managers from one firm pointed to "a game of chicken in the oil market".

Alastair Baker and Patrick Brenner, multi-asset fund managers at UK-based firm Schroders, say the dramatic fall in the oil price reflects a battle of wills between the Organisation of the Petroleum Exporting Countries (OPEC) and non-OPEC producers, mainly US shale oil firms, "to see who will blink first".

Although OPEC producers such as Saudi Arabia and Kuwait are losing billions due to the low oil price, Baker and Brenner say it will be the shale oil producers who are worst affected in the short term.

There has been "a substantial oversupply of shale oil production in North America," they say. "Our expectation is that shale oil producers will be forced to cut capital expenditure as their revenues decline."

They add that "many shale oil producers [will] experience severe financial difficulties".

Although the fund managers predict stabilisation and perhaps a rebound in oil prices in the medium term, they recommend reducing exposure to shale oil firms in the near term. One method is to move out of US high yield bonds, many of which are in the energy sector and therefore tied to the fortunes of US shale oil.

The fall in oil prices means many oil-producing nations in the Gulf will have to dip into their foreign exchange reserves or borrow to meet their spending targets this year.

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