Crude Oil – you won’t believe what’s going on behind the world’s most heavily traded commodity: Many investors miss out on the benefits of diversification and – for want of a better description, the pureness of taking a trade which “invests at the source”.
What we mean by this; is that if you have a view on oil, why buy oil shares when you can trade the commodity itself? Pure exposure to oil price moves, not the messy performance of the company’s share price.
Is this a new norm?
After a period of sustained price pressure – as a result of the push in global economic growth, demand has slackened a touch and production increased.
New sources – not discovery – but sources such as the fracking industry have contributed to a push higher in production, although one area which has many investors scratching their heads, is OPEC.
With prices coming off sharply, OPEC has continued to “pump”, adding to the weight on crude’s price. In fact, production has actually increased in some areas and this is in stark contrast to anything OPEC has ever previously done.
Is this part of a broader agenda?
Perhaps by taking some short-term pain, they can enjoy longer term pleasure. Sounds a bit like Gold and our conspiracy theory – well we do live in interesting times, my friend!
The old cost-pressure squeeze
Many of the new sources of hydrocarbon energy come from a higher cost base – lower crude prices exert margin pressure and perhaps put on a hand-break, in terms of re-opening old fields and tapping into more sources. I.e. it is simply not cost effective to carry on the super expensive exploration activity.
Maybe this also keeps the global “Super-Powerplay” strangle hold in place too?
By working with the US, OPEC through increased production and lower prices, are exerting further pressure on the energy exporting Russian economy. It would seem on first brush, Russia doesn’t have many friends in the international community just now, and recent hardline, back to the old days, actions within the former Soviet Union – the Ukraine being an example – provide some level of reason.
As a result, an economic “wing clipping”, via weaker energy prices will hurt Russia and its economy.
Then there is the Green alternative
With lower crude prices, the urgency to find an alternative is lifted – for the moment. With crude at north of $130, a fix for the World’s energy problems is an easy story to market, raise capital for and get over the line. Check out how Tesla has gained mainstream popularity on the back of the past few years’ energy prices!
As an aside, that is not the only reason for their success – the product is simply outstanding!
The correlation with Gold
Oil and gold are typically stablemates, when it comes to performance. This unraveled for the first time in half a decade, earlier in the year, but nonetheless, we would suggest this will recouple. Given our outlook for Gold is also bearish, we expect to see crude oil lower too.
Ok, so how low can it go?
The variable here is geopolitics. As things stand, with global growth slowing and plenty of supply being on hand, a level for crude in the low to mid $90s is consistent with our outlook. As always, the risk with oil is to the upside i.e. act of terror, supply disruption etc and given the amount of uncertainty from a geopolitical perspective, then this is a risk that very much remains in play.
So is this good news?
The positive to all this is that lower energy prices have a similar effect to lower taxes, in terms of boosting household disposable income. In other words this is an economic stimulant.
A drop in crude (rather than a drop of crude) will provide further stimulus – that is of course, assuming that the fall in price is passed on to the consumer. As noted in our Australian outlook, this has failed to materialize in the land of plenty, as yet…
But not for everybody
A final thought for you to consider. Oil price falls don’t help everyone in the same way (and I am sure you are thinking it won’t help the producing nations).
For example, the 30% fall in crude prices will provide China with an estimated equivalent of $130bn in savings on its energy bill. Not to be sneezed at!! The same could be said of North America too, where Energy consumption is second to none.
However, spare a thought for poor old Japan. Not only has it been in economic and stock market decline for 25 years, but even though oil prices have dropped by 30% or so, the devaluation of the Yen courtesy of the Abe Government’s policy of devaluation, has resulted in the current Oil pain.
Simply put, the Japanese currency is now worth 55% less than what it was back in 2012. As a result, even though oil is 30%ish lower, the Japanese are paying more for oil, in their own currency, than they were when crude prices were north of $115. Now that has got to hurt!!
How about the totally unthinkable?
Maybe the next chapter would be for the absolutely unthinkable, in the 70s and 80s, to become a reality now?
Can you even imagine that an American high tech innovation – not a Japanese one, better yet and American motor car (yep this is unthinkable) may start to gain a share of Japan’s domestic car market?
Well how about if Tesla Motors eased Japan’s fuel worry by selling their electric solution? Wow – no pun intended, but how the wheel has turned!!!
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