Oil’s great decline. Is it time to buy?
It was only two days ago that I sent an update to all of my clients informing them of the possible opportunity associated with the oil-price crash. I didn’t expect my sombre prediction of oil’s continued decline to be proven right after just 48 hours. How quickly things are moving is highlighted by the fact I started writing this article on Wednesday at 9pm with oil sitting at $24.34 a barrel (WTI Crude). By the time I had finished this article at 10.15pm, oil had fallen a further 6.8 percent to $22.67 a barrel.
I have spoken to most clients this last week and understandably many have similar questions, so I thought it best to take the time to not just update readers on the oil opportunity but to also answer questions as best I can.
Will the price continue to fall?
We are seeing the perfect storm for oil. Coronavirus and the subsequent market collapse have resulted in the lowest oil demand outlook we have witnessed in a long time if not ever, with a simultaneous collapse in jet fuel, gasoline, shipping fuel and petrochemicals.
Add to this Saudi Arabia’s price war and promise, together with former ally Russia to flood the market with cheap oil, we will soon find ourselves with an oil glut like never before. The problem with this is there is limited storage and, once gone, oil producers face an entirely new but equally costly problem.
How low can it go?
Many of the leading analysts are predicting we will see oil hit $20 a barrel, given we are already in the $22 range, the more bullish analysts predicting oil in the late teens don’t seem quite so radical today.
As for when we can expect the bottom, the truth, as with most investments is, nobody has a clue. A notable date to keep in mind however is April 1, when Saudi Arabia and Russia ramp up their crude production after a previously agreed OPEC+ deal expires.
When is the right time to buy?
Similar to the last point, nobody can say for sure, which is why I am personally investing on the basis of a staggered approach, starting at a price point that I feel is attractive, for me that was $24, swiftly revised to $22 this week but after tonight now deciding to see how the remainder of the week plays out before I step in. The plan after this will be to place the first part of my investment at say the $20 mark, should it drop further to say $18, I would then invest further and so on, the same would apply if the price went up after my first investment. This would give me an overall entry point that I would be comfortable with at the same time as limiting my risk. Please note however, if we see oil drop quickly into the late teens, the need for a staggered investment is significantly reduced.
How do I buy oil?
Don’t worry: you don’t have to fill the spare bedroom with barrels of oil. The simplest and most cost effective method to track the price of oil is with an Oil ETF but be careful because there are many out there, some of which don’t actually track the oil price; they track a basket of oil companies.
How long will it take to recover?
Historically we have seen oil bounce back to the “average price of oil” in a matter of three to five quarters as per the chart but this doesn’t guarantee the same will happen this time round. We really are in uncharted territory with the Coronavirus. What we can say with certainty is the world will still need oil and, once the geo-political tensions subside, we should see the oil price recover. Remember we don’t need to see a return to the $147 highs of 2008, just a return to the low average of $45 a barrel will be a healthy profit, assuming an entry point in the mid to low 20s.
Adam Clark is managing partner, Misthos Group, Malaysia, based in Bangkok