Refine the way you think about oil
This week, I want to talk about oil - the life-blood of the global economy.
Why is the oil price so important?
Well it’s because it affects the price of goods and services to us, the end users, as well as being an input cost for businesses in the supply chain.
Brent crude oil has had a massive 30 per cent gain over the past 10 days.
As I mentioned, the oil price plays a big role in an economy and, for those of us who trade in the commodity, it’s been quite an anomaly.
In a local context, higher oil prices and a weaker Rand means everything goes up.
Not just at the fuel pump, but also at the local grocery store.
Let’s explore what global factors are at play at the moment for the black gold
There has been a reduction in crude oil inventories in the US over the last several weeks and we have seen the oil price react positively and test $50 per barrel a few times now.
But what has happened to those oil stockpiles that were at record highs a few months ago?
After reading a Bloomberg article on Morgan Stanley’s concern over the near future’s price of oil, I have started becoming more sceptical about “supply and demand” balancing out near the end of the year.
So about those record stockpiles…Well, they have been refined and been turned into gasoline and other fuel.
My question (and Morgan Stanley’s call) is what if gasoline becomes over-supplied?
It stands to reason that there will begin a new cycle of lack of demand from gasoline suppliers which, in turn, will impact on the demand for oil.
“The global oil market is ‘severely over-supplied’ with gasoline,” said Stanley.
Gasoline inventories are piling up and this means that these refiners will need to start cutting back on capacity utilisation to protect profit margins.
The only way to achieve this is to start reducing their oil purchases, which will most certainly weigh on crude oil prices.
Demand dictates the price
Refineries are the real true consumers of crude oil.
For the first time in three years, crude demand is below final refined product demand.
It has to crack somewhere, in fact, Stanley’s analysts expect crude oil demand to deteriorate further “in the coming months”.
High levels of stocks across the board
The conundrum is this:
There is still a glut of oil in the market.
The price has only recently been propped up by improved petrol demand from emerging markets and recent production disruptions.
The recent high gasoline demand has only been met with even stronger refinery supply.
In fact, analysts at Citigroup Inc. believe “that the elevated stock of crude and petroleum products, macro concerns, and a stronger US dollar are all headwinds for oil prices”.
Iran is pumping the stuff at a rate of knots since sanctions were lifted earlier this year, adding to global over-supply.
From a South African point of view, higher oil prices are bad news for consumers and our economy is fragile enough at the moment to deal with more inflation.
I don’t think this will persist, though.
As an investment case, the fundamentals still point to lower prices for longer.
Is purchasing property a good investment?
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