2019-08-01_Shares_Magazine

AEQUITAS

32 | SHARES | 01 August 2019

Insightful commentary on market issues

S

tock markets are generally rising high,

especially in the US, but commodity prices

are doing nothing of the sort with the

ŽĐĐĂƐŝŽŶĂů͕ƐƵƉƉůLJͲĚƌŝǀĞŶĞdžĐĞƉƟŽŶƐƵĐŚĂƐŶŝĐŬĞů

or iron ore. Despite a robust spring rally, the

Bloomberg Commodity index is down by around

5% from where it stood a year ago and Brent crude

oil is 14% lower.

dŚŝƐĐŽƵůĚƐƵŐŐĞƐƚƚŚĂƚĂůůŵĂLJŶŽƚďĞĞŶƟƌĞůLJ

well with the global economy, as you would expect

ƚŽƐĞĞƌĂǁŵĂƚĞƌŝĂůƉƌŝĐĞƐƌŝƐĞŝĨĂĐƟǀŝƚLJĂŶĚ

demand levels were high. That said, oil demand

ŝƐĞdžƉĞĐƚĞĚƚŽŚŝƚĂŶĞǁĂůůͲƟŵĞŚŝŐŚŝŶϮϬϭε͕

ĂƚĂĨƌĂĐƟŽŶƵŶĚĞƌϭϬϬŵďĂƌƌĞůƐĂĚĂLJďLJƚŚĞĞŶĚ

of the year.

Kŝů͛ƐůĂƚĞƐƚƐƟĐŬLJƉĂƚĐŚŵĂLJďĞŵŽƌĞƌĞůĂƚĞĚƚŽ

supply than demand. If so, investors need not be

too alarmed by weakness in the price of crude.

RIGS ROLLING OVER

Supply can be quickly gauged. On the face of it, oil’s

ůĂƚĞƐƚǁŽďďůĞŝƐĐƵƌƚĂŝůŝŶŐĨƌĞƐŚĞdžƉůŽƌĂƟŽŶǁŽƌŬ͕

as you would hope and expect. Data from Baker

,ƵŐŚĞƐƐŚŽǁƐƚŚĂƚƚŚĞĂĐƟǀĞh^ƌŝŐĐŽƵŶƚŝƐεй

ůŽǁĞƌƚŚĂŶŝƚǁĂƐĂLJĞĂƌĂŐŽĂŶĚƚŚĞŝŶƚĞƌŶĂƟŽŶĂů

ĐŽƵŶƚŝƐϯйŚŝŐŚĞƌ͕ĂƐŽŝůĮƌŵƐŬĞĞƉĂĐůŽƐĞĞLJĞŽŶ

ƚŚĞŝƌĞdžƉĞŶƐĞƐĂŶĚĐĂƐŚŇŽǁ͘

Further good news can be found in the form of

falling American oil inventories. US stockpiles of

ĐƌƵĚĞĂƌĞŶŽǁεйůŽǁĞƌƚŚĂŶƚŚĞLJǁĞƌĞĂLJĞĂƌĂŐŽ͘

This is despite a sustained increase in American

ŽŝůĂŶĚŐĂƐŽƵƚƉƵƚĨƌŽŵŝƚƐŽŶƐŚŽƌĞƐŚĂůĞĮĞůĚƐ͘Kŝů

ƉƌŽĚƵĐƟŽŶŝƐƵƉďLJƐŽŵĞερϬ͕ϬϬϬďĂƌƌĞůƐĂĚĂLJ͕Žƌ

13%, over the past year.

This could be a key factor in capping the oil

price, since this surge in output goes a long way to

ĐŽŵƉĞŶƐĂƟŶŐĨŽƌƚŚĞϭ͘ϮŵďĂƌƌĞůĂĚĂLJƉƌŽĚƵĐƟŽŶ

ĐƵƚƐĂŶĐƟŽŶĞĚďLJKWŝŶsŝĞŶŶĂůĂƐƚĞĐĞŵďĞƌ

and then again in June.

We try to make sense of the oil market and how it is currently viewed by investors

What we can learn from

oil’s latest sticky patch

US SHALE OUTPUT GROWTH IS SLOWING

^ŽƵƌĐĞ͗h^ŶĞƌŐLJ/ŶĨŽƌŵĂƟŽŶĚŵŝŶŝƐƚƌĂƟŽŶ

GROWTH IS GLOBAL RIG ACTIVITY IS SLOWING DOWN

^ŽƵƌĐĞ͗ĂŬĞƌ,ƵŐŚĞƐ