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Oil Glut Will Strain Investor Patience

Oil Glut Will Strain Investor Patience
(Dollar Photo Club)

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Friday, 21 August 2015 07:34 AM Current | Bio | Archive

China confirmed it will face slower growth for longer, which will negatively affect global growth while its currency, the renminbi/yuan (CNY), will continue to remain under downward (weakening) pressure.

The August Caixin/Markit Flash China General Manufacturing PMI came in at 47.1 (48.2 expected), down from 47.8 in July and at a 77-month low. The Flash China General Manufacturing Output Index came in at 46.6 in August, down from 47.1 in July and at a 45-month low.

Meanwhile, the Standard Chartered bank stated it expects the Chinese banks’ Reserve Requirement Ratio (RRR) at the PBoC could be cut by another 50-100 basis points as early as this weekend.

As a long-term investor, we should not overlook the fact that the last time the People’s Bank of China cut the RRR was only about 2 months ago (June 28th) by 25 basis points, which was its 4th consecutive RRR-monetary easing measure since November 2014 in the hope of spurring the slowing Chinese economy that has apparently remained without success so far.

No wonder we see today again weaker oil alongside weak performing commodities with the exception of gold, which seems to regain bit by bit its “safe-haven” status, notwithstanding we are in a global dis-inflationary world.

That said, it’s also not surprising there are rising calls this time could be (or become) right for considering to start investing in oil and oil related vehicles again.

In my opinion I’d prefer to remain cautious, but of course that’s strictly my personal opinion.

Long-term investors could do well taking a view on the price of oil over a longer time span.

When we look at a 30-year price chart of oil, we see oil peaked in November of 2008 at $147 per barrel and hit its low in April of 1986 at $9.75 per barrel while its average price over these 30 years is at about $42 per barrel.

As the old saying goes: “Always try to buy when the bottom (in prices) falls out,” it’s impossible to pretend the bottom of oil prices is falling out now.

Also, when considering the investment technique that takes into consideration, before buying or selling investment vehicles like stocks, commodities, etc., their “mean reversion” or average price over a longer period of time is important especially when their recent market prices differ greatly from their historical averages, as prices tend historically to return over time to their “mean reversion” or average prices.

In this context, it could be somewhat enlightening to look at some of the reasons why the oil price has behaved in such an erratically way this year. 

No doubt, the more than expected slowing of the Chinese economy has been a huge negative. Please keep also in mind, improving the Chinese economy will need much more time than generally expected.

Besides that, there is the undeniable fact the world is facing an oil-glut that probably also won’t go away in the near future.

U.S. producers will still pump more oil this year than at any time over the last 45 years with about 9.5 million barrels per day (bpd), which is interestingly around 40k barrels more than the Energy Information Agency (EIA) predicted in June.

OPEC, which supplies 40 percent of the world’s crude, continues to produce well above its agreed on 30 million (Mn) barrels per day (bpd) quota, and it still looks like that’s not going to change over the next couple of months.

So far, literally nobody talks seriously of cutting production.

For example, this week we learned:
  • Saudi exports rose to 7.365 Mn bpd in June, up from 6.935 Mn bpd in May;
  • Reuters reported Angola is planning to ship 1.83 Mn bpd in October, which will be its highest level in 4 years;
  • Iraq increased its output to a record high in July at 4.18 Mn bpd;
  • while the World Bank informed Iran could add up to 1 Mn bpd in 2016 as a consequence of the lifting of the sanctions.
With a 30-year average oil price at about $42, long-term investors could do well looking out for when oil prices reach the mid-$30s zone, as where it was on the turn of 2008/2009.

Investors must also look at the technical (charting) analyses and the global physical situation of oil before taking an investment decision.

Anyway, oil should become an interesting investment vehicle once again at some time in the future, but we aren’t there yet.

Remaining patient, which is easier said than done, is the message.

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HansParisis
Oil should become an interesting investment vehicle once again at some time in the future, but we aren’t there yet.
oil, crude, investors, fed
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2015-34-21
Friday, 21 August 2015 07:34 AM
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