PASADENA, Calif., March 18, 2015 /PRNewswire/ -- The dramatic decline in oil prices over the past six months is unlikely to reverse itself for the foreseeable future, and indicates that OPEC has lost control of the market, according to a panel of experts at a recent Legg Mason-sponsored advisor forum near Los Angeles.

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In a lively discussion entitled "Ripple or Tsunami? Assessing Oil's Future Impact on the Markets" moderated by Consuelo Mack, executive producer and managing editor of Consuelo Mack WealthTrack, respected analysts from Western Asset offered their perspectives on structural changes to the energy market. The consensus: the decline in oil prices represents a "tsunami"--a long-term shift that could hold per-barrel prices in the $50-$60 range for the next several years.

"Last October, with US oil production surging, the Saudis and other countries such as Oman, Kuwait and the United Arab Emirates started discounting the price of oil to Asia in an effort to keep share. At the OPEC meeting a month later, there was an expectation that the cartel would use its natural control of the market to adjust the perceived supply-demand imbalance, but nothing was done--a signal that OPEC had lost control and that the cartel effect was over," said Research Analyst J. Gibson Cooper. This created a dramatically altered landscape that has forced financial advisors to rethink fundamental investment strategies.

The good news, said Ryan Brist, head of US investment, is that, from a portfolio perspective, "you've got a lot of time here"--a sentiment echoed by Cooper. "Our expectation is you will see defaults rise moderately in the energy sector," he said. "We don't think 2015 is a year of massive pain for high-yield energy credits generally. Given our view that oil will probably stay around this price for a couple of years, 2016 is a bigger question."

For now, Cooper continued, the energy market remains appealing. "Yes, defaults will rise, but we think current spread levels and prices overcompensate for default risk," he said.

Brist indicated there may be downside risk in the high-grade marketplace, but that other opportunities abound. "There's a great dispersion in energy and, especially in emerging markets like Russia and Brazil, where we're talking about fraud and government intervention, I'd be cautious. But high yield looks pretty interesting; from a portfolio perspective, that would be my focus."

Cooper drilled down even further within high yield, which, he pointed out, is an extremely large market. "Broadly speaking, it's three major sectors: exploration and production, oil service companies and then the midstream sector. That midstream space is still a large part of our strategy. Nearly all of those are structured as master limited partnerships (MLPs), and we think that subset of energy will do just fine under any commodity environment."

Right now, the analysts affirmed, the name of the game is liquidity. "The question," said Cooper, "is whether you can build levers or bridges in your business to withstand a low commodity environment. Our assumption is that not everything works at $50-$60 in the US, or even globally."

Additionally, upside risks always exist, particularly, said Cooper, with a cartel that controls 30 million barrels per day of production. "We've seen issues in Iraq, Libya has been a concern and there's a big election in Nigeria that keeps getting postponed, it's very violent and we've seen production in fits and starts there." But this past quarter, he noted, everything has gone right for production: The US has been doing well, OPEC production has been strong and volatility has stayed low.

All of this, as Brist sees it, reduces the chances of a dramatic surprise in oil prices. "Analysts are very good at counting barrels on the supply side, but demand is a hard thing to gauge," he said. Yet, based on current conditions, he continued, "I think the base case--that $50-$60 per barrel price--is our highest probability."

About Western Asset
Western Asset Management is one of the world's leading fixed-income managers with $466 billion in assets under management as of December 31, 2014. The firm is a wholly owned, independently operated subsidiary of Legg Mason, Inc. (NYSE: LM) From offices in Pasadena, Hong Kong, London, Melbourne, New York, Sao Paulo, Singapore, Tokyo and Dubai, the company provides investment services for a wide variety of global clients, across an equally wide variety of mandates. To learn more about Western Asset, visit their web site at www.westernasset.com.

About Legg Mason
Legg Mason is a global asset management firm with $711.0 billion in assets under management as of February 28, 2015. The Company provides active asset management in many major investment centers throughout the world. Legg Mason is headquartered in Baltimore, Maryland, and its common stock is listed on the New York Stock Exchange (symbol: LM).

Equity securities are subject to price fluctuation and possible loss of principal. Risks of MLPs and the energy sector, include the risks of declines in energy and commodity prices, decreases in energy demand, adverse weather conditions, natural or other disasters, changes in government regulation, and changes in tax laws. Investments in fixed-income securities involve interest rate, credit, inflation and reinvestment risks; and possible loss of principal. An increase in interest rates will reduce the value of fixed income securities. International investments are subject to special risks including currency fluctuations, social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets. Risks of high-yield securities include greater price volatility, illiquidity and possibility of default.

© 2015 Legg Mason Investor Services, LLC, member FINRA, SIPC. Western Asset Management, and Legg Mason Investor Services, LLC, are subsidiaries of Legg Mason, Inc.

Views expressed are not intended to be a forecast of future events, a guarantee of future results, or investment advice. Predictions are inherently limited and should not be relied upon as an indication of actual or future performance. As a result, Legg Mason cannot guarantee the accuracy or completeness of any statements set forth in this article. All information was current at the time of this publication and is subject to change without notice. This article should not be deemed as an offer to sell or a solicitation to buy the securities mentioned in this article.

INVESTMENT PRODUCTS: NOT FDIC INSURED | NO BANK GUARANTEE | MAY LOSE VALUE

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SOURCE Legg Mason, Inc.