Shares Magazine – May 23, 2019

TALKING TALKING POINTPOINT Our views on topical issues

10 | SHARES | 23 May 2019

We look at what might be influencing the stance of producers’ cartel OPEC

ahead of key summit

What the current oil price

rally means for investors

S

ince the start of 2019 the

global benchmark for oil

prices, Brent crude, has

enjoyed a rollercoaster ride.

&ŽƌƚŚĞŵŽƐƚƉĂƌƚƚŚĞĚŝƌĞĐƟŽŶ

of travel has been upwards from

ĂůŝƩůĞŵŽƌĞƚŚĂŶΨρϬƉĞƌďĂƌƌĞů

ƚŽĂďŽǀĞΨϳϬƉĞƌďĂƌƌĞů͘

The surge is being driven by

ŵƵůƟƉůĞĨĂĐƚŽƌƐ͘dŚĞƐĞŝŶĐůƵĚĞ

ĨĞĂƌƐŽĨĐŽŶŇŝĐƚďĞƚǁĞĞŶƚŚĞh^

ĂŶĚ/ƌĂŶĂŶĚƚŚĞƌĞŝŵƉŽƐŝƟŽŶ

ŽĨƐĂŶĐƟŽŶƐŽŶƚŚĞůĂƩĞƌďLJƚŚĞ

ĨŽƌŵĞƌ͖ĐŽŶŇŝĐƚĂŶĚƚƵƌŵŽŝůŝŶ

Venezuela and Libya; as well

as industrial sabotage on key

ŝŶĨƌĂƐƚƌƵĐƚƵƌĞŝŶ^ĂƵĚŝƌĂďŝĂ͘

dŚĞƌĞŚĂǀĞďĞĞŶƐŝŐŶŝĮĐĂŶƚ

stumbles along the way – for

example, oil fell as much as 4%

ŽŶϮςƉƌŝůǁŚĞŶŽŶĂůĚ

Trump tweeted that he had

asked oil producers’ cartel

KWƚŽƚĂŬĞĂĐƟŽŶƚŽŬĞĞƉĂ

lid on prices.

^ŽĨĂƌŚĞĂƉƉĞĂƌƐƚŽŚĂǀĞ

been politely ignored and while

OPEC or OPEC+ (the moniker

which encompasses other major

producers like Russia) does not

ŚĂǀĞƚŚĞŝŶŇƵĞŶĐĞŝƚĚŝĚŝŶŝƚƐ

ϭεϳϬƐĞŶĞƌŐLJĐƌŝƐŝƐŚĞLJĚĂLJ͕ƚŚĞ

ĐĂƌƚĞůƌĞŵĂŝŶƐŝŶŇƵĞŶƟĂů͘

OPEC MEETING IN FOCUS

Whether oil maintains its current

trajectory could depend on how

OPEC responds at its next big

ƐƵŵŵŝƚŽŶϮρ:ƵŶĞ͘

In truth, given it is the member

ǁŝƚŚƚŚĞŵŽƐƚŝŶŇƵĞŶĐĞĂŶĚ͕

to avoid a repeat of the fourth

quarter of 2018.’

/ŶƚŚĞĮŶĂůƚŚƌĞĞŵŽŶƚŚƐŽĨ

ϮϬϭΘŽŝůƉƌŝĐĞƐĨĞůůƐŚĂƌƉůLJĂŌĞƌ

^ĂƵĚŝŝŶĐƌĞĂƐĞĚŝƚƐƉƌŽĚƵĐƟŽŶŝŶ

ƚŚĞĞdžƉĞĐƚĂƟŽŶŽĨĂĚŝƐƌƵƉƟŽŶ

to Iranian supply. This was put on

ƉĂƵƐĞĂƐƚŚĞh^ŝŶĐůƵĚĞĚŵŽƌĞ

ǁĂŝǀĞƌƐŝŶŝƚƐƐĂŶĐƟŽŶƐƚŚĂŶ

expected.

Oil price strength is a double-

ĞĚŐĞĚƐǁŽƌĚĨŽƌh<ŝŶǀĞƐƚŽƌƐ͘

/ƚŝƐƉŽƚĞŶƟĂůůLJŐŽŽĚŶĞǁƐĨŽƌ

oil majors BP (BP.) and Royal

Dutch Shell (RDSB) which occupy

ŚĞĂǀLJǁĞŝŐŚƚƉŽƐŝƟŽŶƐŝŶƚŚĞ

London market.

However, when Trump

tweeted that a retreat in oil

ƉƌŝĐĞƐƚŽΨρρƉĞƌďĂƌƌĞůŝŶ

November 2018 was a big tax cut

ĨŽƌŵĞƌŝĐĂĂŶĚƚŚĞǁŽƌůĚ͕ŚĞ

was on to something. Logically

the recent strength in oil

prices may feel like a tax bill for

businesses and consumers.

ĐƌƵĐŝĂůůLJ͕ƐƉĂƌĞƉƌŽĚƵĐƟŽŶ

capacity, the response will

ĚĞƉĞŶĚŽŶ^ĂƵĚŝƌĂďŝĂ͘

In a recent piece of research

ŽDĞƌƌŝůů>LJŶĐŚƐƉĞůůĞĚ

ŽƵƚǁŚLJƚŚĞ^ĂƵĚŝƐŵŝŐŚƚďĞ

reluctant to ramp up output.

/ƚƐĂLJƐ͚͗^ĂƵĚŝƌĂďŝĂŚĂƐ

ƌĞƉĞĂƚĞĚůLJƐƚĂƚĞĚŝƚƐŝŶƚĞŶƟŽŶ

to give away oil market share

in exchange for higher dollar

prices in recent months. The

ƌĂƟŽŶĂůĞďĞŚŝŶĚƚŚŝƐĚĞĐŝƐŝŽŶŝƐ

ƉƵƌĞůLJĮŶĂŶĐŝĂůĂŶĚĐŽŶŶĞĐƚĞĚ

both to its current account and

ŐŽǀĞƌŶŵĞŶƚďƵĚŐĞƚƉŽƐŝƟŽŶƐ͘

͚ĐĐŽƌĚŝŶŐƚŽŽƵƌĞĐŽŶŽŵŝƐƚƐ͕

the 2019 budget break-even

ŽŝůƉƌŝĐĞĨŽƌ^ĂƵĚŝƌĂďŝĂŝƐ

ĂƌŽƵŶĚΨεϯƉĞƌďĂƌƌĞů͘/ŶŽƚŚĞƌ

ǁŽƌĚƐ͕ǁĞĞdžƉĞĐƚ^ĂƵĚŝƚŽ

ďƌŝŶŐƉƌŽĚƵĐƟŽŶďĂĐŬƐůŽǁůLJ

By Tom Sieber

ĞƉƵƚLJĚŝƚŽƌ

50

60

70

80

2018 2019

Crude Oil $/Barrel