Oil as Leverage
Pfäffikon SZ, Switzerland – The price movement in oil has been the topic of the day for the last several weeks. This is not surprising as oil plays a key role in our economy. I gladly leave the prediction of the oil price to others. Not too long ago market researchers were shouting in unison that we should not rule out USD 200 a barrel. This week oil (Brent) reached USD 68 per barrel. In my view oil is heavily “oversold” and some type of recovery seems imminent, but I don’t speculate in it. That certain bank-controlled dealing rooms once again had spotted an opportunity was evidenced by the morning trade in Royal Dutch Shell last Monday.
Manipulation
During the opening of the stock Royal Dutch Shell at Beursplein 5 in Amsterdam an impressive act of market manipulation was on display. The oil giant, with low volume, immediately dropped over 3 percent, which rendered several turbos, speeders and sprinters worthless, as the stop loss was being exhausted minutely. It’s high time the regulator clamps down on these transparent trading practices. I have argued in the past in favor of avoiding these types of products. A false sense of security is being sold while in the mean time any upward potential in your portfolio is killed off in an unguarded moment. When one takes the this week’s price development of Royal Dutch Shell into account, the incident is all the more painful.
Conspiracy
The decline in oil price logically raises a lot of questions, which has prompted many different conspiracy theories. The decline would mainly benefit the US but also hurt Russia, two birds with one stone one would be led to believe. The Russian economy would supposedly already have collapsed. The Russian banking sector is undergoing a situation quite similar to that of 1998, when the Ruble also collapsed. I admit, the Russian economy is difficult to comprehend, but it’s much more diversified and flexible than most think. The oil and gas industry comprise a mere 18 percent of the Russian economy. The current developments are creating many opportunities for investors with a distant horizon, now that the perfect storm is making its way across the region. Russia will without doubt survive this storm, just as was the case in 1998.
Shale Gas
Shale gas is becoming an increasingly large part of the US energy needs, because the US wants to be able to satisfy its own energy needs. Shale gas would supposedly be the magic word, whereby pressing environmental concerns – such as the enormous waste of water – would be taken for granted. The Middle-East in light of these developments has seen its share diminish, and now the gentlemen are saying enough is enough. The logical consequence is that Opec opens up the oil valve to kill off shale gas. The shale gas operators in general are financed at small margins and therefore have no place to go. With the current relatively low oil price shale gas is produced at a loss, the break-even point lies at around USD 80 per barrel. The operators therefore have no choice other than shelving their unbridled ambitions. The result is that the Middle-East continues to hold on to its market share, achieving its goal. Another additional element is the sharply increased dollar, which is possibly due to the IS fighting in the Middle-East, which causes many investors to flee the area to dollar related investment environments.
Impulse
Oil is being used as leverage. The fact that the markets initially declined due to the lower oil price – some oil related stocks specifically – was laughable to me. A low oil price gives the world economy a gigantic impulse and according to Christine Lagarde form the IMF it’s even “a blessing”. The deflationary effect of a low oil price is only temporary. Of course there are also risks to an excessively low oil price. But I can only hope that the oil companies have learnt their lesson during the last price decline in the black stuff.
It remains for me to wish you a good weekend.
Jan Dwarshuis is a senior asset manager at Thirteen Asset Management AG, where he is responsible for the Thirteen Diversified Fund. Dwarshuis writes his columns in a personal capacity and is not paid for them. Nor is he paying for his columns to be placed. Professionally, he holds positions in major European, American and Russian stock funds. The information in his columns is not intended as professional investment advice or a recommendation to make certain investments. At the time of writing, he has no position in the above shares and has no intention of doing so in the next 72 hours.
