Pimco calls worst of commodity crunch over with oil seen gaining

The worst of the collapse in commodities prices is probably over, with oil poised to gain over the next 12 months, according to Pacific Investment Management Co. Just don't expect a major rebound.

Producers are shelving projects and scaling back output from Arctic oilfields to Indian aluminum mills amid the weakest returns from raw materials since 1999. While the response may help draw a line under the rout, prices are set to remain "lower for longer" because of excess inventories, according to the firm that manages $15 billion in commodity assets.

"The declines in commodity prices are largely behind us," executive vice presidents Greg Sharenow and Nic Johnson said in an e-mail. Newport Beach, California-based Pimco has about $1.52 trillion under management. "Most prices are well into the marginal cost curve across metals and oil, and that will help to put a floor under prices here."

Oil may rise to a "baseline" of about $60 a barrel in one year's time as the impact of supply cuts becomes more evident from early 2016, according to Sharenow. US crude output is down about 440,000 barrels a day from a four-decade high of 9.61 million barrels in June and the nation's drillers have sidelined more than half of the country's rigs in the last year.

Benchmark crude in London and New York tumbled to six-year lows in August and weaker prices are having a "significant impact on forward production growth," said Sharenow. Factor in natural decline rates and it means the oil market can re-balance supply and demand faster than other sectors like steel or aluminum, he said. West Texas Intermediate was at $49.63 a barrel on Friday while Brent was at $52.65.

Producers are benefiting from oil's best week since August. A Bloomberg Intelligence index of North American exploration and production companies is up 34 per cent since touching a six-year low last month.