Skip to main content

Crude Oil – you won’t believe what’s going on behind the world’s most heavily traded commodity

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 stable mates, 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!!

Comments

Popular posts from this blog

Ensuring Your Legacy: The Importance of Estate Planning and Wealth Preservation

Introduction Estate planning and wealth preservation are vital components of financial management that extend far beyond the realm of the affluent. Regardless of one’s economic status, creating a comprehensive plan ensures the orderly distribution of assets and minimizes potential disputes among heirs. This article delves into the significance of estate planning and wealth preservation, exploring key strategies to safeguard and transfer wealth effectively. Understanding Estate Planning Estate planning is the process of organizing and managing one’s assets during their lifetime and determining their distribution after death. It involves a thorough examination of financial holdings, including real estate, investments, business interests, and personal belongings. The primary goals of estate planning are to minimize taxes, ensure a smooth transfer of assets, and provide for loved ones in accordance with the individual’s wishes. One essential component of estate ...

Why Investment News Will Help You Make More Confident Decisions - Australian Investment Education

  Many “would be” investors think the best way to make profitable trades is to get a trading platform, look at the charts and just give it a go. If only it were that easy… Over a thirty year professional trading career and having helped “rehab” thousands of investors, I have learned that there is a lot more to it than that! And that’s where Investment News comes in.

Navigating the Top 5 Market Trends in 2024 - Andrew Baxter

  1. Artificial Intelligence and Tech Stocks Artificial intelligence (AI) continues to dominate discussions in the financial markets . Tech stocks, particularly those involved in AI, have shown remarkable performance. The NASDAQ, driven by companies like Nvidia, has seen impressive gains, echoing the strong performance of 2023. However, this sector’s success also brings volatility. Overvaluation and shifting market sentiment could lead to sudden downturns. It’s crucial to monitor these stocks carefully and consider diversifying your portfolio to avoid overexposure to this volatile sector. 2. ESG Investing Environmental, Social, and Governance (ESG) investing has been a hot topic throughout 2024. However, the enthusiasm for ESG seems to be waning in the face of economic pressures. Countries like the UK have reconsidered their carbon-neutral goals due to economic constraints, and companies like Fortescue Metals have scaled back their green energy projects. While ESG remains important...