Cheap oil is behind us

 12 December 2020

Dear Fellow Investor,

Weekly chart of the XLE ETF which represents major  energy companies traded on the NYSE

The index has risen over 25 % from the lows and trades above its 50 week moving average. The KLSE energy index chart is similar and is in an up trend.  This indicates that energy demand is recovering due to positive news on the Covid front.

As Malaysia is an exporter of crude oil and natural gas this is a benefit to our trade and balance of payments. That could be one reason why the KLSE has reacted positively including the banks and financial companies.

On Friday the EWM, the ETF representing the blue chip KLSE shares which trades on the NYSE was up strongly on high volume showing international interest in Malaysia as well as energy shares.  

From the Fleet St Report in London. They are bullish oil and commodities

The key to a green revolution? Oil

On the face of it, you would think oil is doomed. But oil drives transport, and other than a small yet growing share of electric cars, oil allows us to move. Planes, trains and automobiles consume oil, and that won’t change anytime soon, despite our leaders’ political goals.

To start a green revolution, the first thing you’ll need is more oil. Wind turbines, batteries, motors and wiring all require base metals such as copper. Yet they also need lithium, nickel, cobalt, lead, zinc, vanadium, sodium, magnesium, cadmium, mercury and more. These vast machines combat nature to extract the metals we so badly need.

In addition, mechanised agriculture feeds the world more efficiently than ever before. It does so using heavy plant and machinery that is fuelled by oil. Electric tractors and trucks may one day be a reality, but before until they’ve commercially available we’re still going to be using oil. To provide the world with the batteries required is a herculean task.

Governments are determined to see this happen. The greens have won the argument, and governments are stepping forward with vast budgets to ensure this happens. The irony is that to rebuild the energy infrastructure, we will need to consume more oil than ever before. This increased demand will see a structural shift in energy consumption.

The oil price is set by the free market which is the most efficient way to balance supply with demand. The history of oil demand is one of continued growth, with consumption only falling when the global economy has been in recession.

Oil literally fuels economic growth. It does the heavy lifting so we don’t have to, allowing us to become more productive elsewhere.

Demand fell in 2020 as the world went into recession. It also stalled in 2001 and 2009, the last time the economy receded.

But look what happened as the recovery took hold. From 2001 to 2008, oil demand rose from 75 million barrels per day (mbpd) to 87 mpbd by 2008. It stalled following the credit crisis only then to hit 100 mbpd for the first time earlier this year. 

Courtesy of the vaccines, the lockdowns that marked 2020 will come to an end and the world will be back on the move. The Spanish flu came after the First World War. What followed? The roaring 20s; an era of decadence. I suspect that once travel reopens, consumers will flock to the airports with the excess savings they amassed over 2020. The planes will fly like never before.

Oil demand will hit a new high, probably in 2021. It will take people by surprise.

Demand must be met by supply. Knowing that oil is politically out of favour, investors have stayed away. As a result, the oil sector offers a rare sea of value in a highly priced stock market. Share prices have been rising since 2009, and by some measures are more expensive than in 1929; the greatest period of excess ever.

Other sectors such as the banks and heavy industry are cheap too. It is the tech sector that shows the clearest signs of excess. Are they green? Not according to Forbes. They point out that the internet consumes 50% more energy than aviation.

The green narrative will put a squeeze on supply.

US shale production ballooned from 5 mbpd in 2008 to 13 mbpd last year. That kept a lid on prices and enabled global supply to meet demand. The Saudis buckled and oil prices collapsed in 2014 from over $100 to an average closer to $50 over the past five years. The worst is behind us and cheap oil won’t last for much longer.

Cheap oil is behind us

 

You’ve no doubt heard about the gold price – it’s rising. But this isn’t just a trend specific to gold. Commodity prices in general will surge in response to government spending plans. When you compare gold to oil, a single ounce has historically bought 20 barrels of oil. At the depths of the crisis in March, that spiked to 70 barrels, and it has since fallen to 38. If this ratio falls further, it will be clear that oil is staging a comeback.

In summary, oil is cheap, demand will rise to new highs while supply will face constraints. It’s the perfect storm.

Our holdings in Wellcall and Dialog should perform in the weeks ahead.

Take care

Bill

Critter of the week is a leopard from Zoo Negara 

Zoo Negara has been receiving generous support during the MCO as reported in The Straits Times

·         Kembara Kitchen delivers frozen food to Zoo Negara

·         Zoo Negara receiving steady flow of visitors

·         Philanthropist offers respite for public, police during MCO

·         Lam Thye rallies support for Zoo Negara

Zoo Negara’s Zoology, Veterinary and Giant Panda Conservation Centre director Dr Mat Naim Ramli said donations and support from the public are also in the form of meat, fish and poultry, allowing the zoo to save money for the coming months.