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Learning to love lower oil prices
1/23/2018 12:59:50 AM
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THE ETF INVESTOR
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By Tyler Mordy  | Monday, December 18, 2017


 



A collective gasp in the global oil market back in August was nearly audible when Royal Dutch Shell PLC’s CEO, Ben Van Beurden, commented, “Lower forever; yeah, that’s the mindset.” Huh…forever? Like “forever-ever”? (in the words of 1990s hip hop group OutKast).

Turns out Van Beurden’s comment was less a forecast and more directed at describing Shell’s new culture of thrift. The company does not want to depend on higher oil prices to boost profits.

To state the obvious, this is a different set of conditions than the heady days of triple-digit oil prices. In 2013 alone, Shell’s capital expenditures peaked at $40 billion. Today, the world is literally swimming in a supply glut with capex budgets slashed across the world.

The longer-term picture may be even more bleak. BP recently pointed out in its long-term energy outlook that oil reserves already discovered around the world far exceed the amount of oil that will ever be consumed, with twice as much technically recoverable oil available than the world needs between now and 2050.

Pricing pressure is coming from both the supply and demand side – from strong growth in U.S. shale oil and from the relentless rise of renewable energy, led by Silicon Valley’s innovation engine and China, the largest maker and seller of electric cars in the world (and, for now at least, buyers of more GM-branded cars than America).

So much for “peak oil.” However, do expect wide volatility. In the period from 1985 to 2004, the oil price frequently doubled or halved in the course of a few months.

Investment implications

We remain steadfast that oil and commodities are in a “lower for longer” phase. Yes, stability may have arrived, and global cyclical upturn may help boost prices. However, a renewed bull market is unlikely any time soon. Prices went through a very typical secular phase – rising demand amidst constrained supply in the early 2000s was met with an enormous surge in capital spending. This increase in supply will keep a ceiling on prices for years.

Looking ahead, global investors should learn to love low oil prices. Cheap oil is a very powerful stimulant for world growth. A tectonic wealth transfer is now underway. Because the world burns 34 billion barrels of oil every year, a US$10 per barrel fall in the oil price shifts roughly US$340 billion from oil producers to consumers. Thus, the enormous price decline since August 2014 will easily redistribute more than $2 trillion annually to oil consumers, providing a bigger income boost than the combined U.S. and Chinese fiscal stimulus in 2009.

This will become more apparent as the positive impact on global consumption, investment, and liquidity materializes over time. Falling oil prices have never correctly predicted an economic downturn. On all recent occasions when the oil price has at least halved, faster global growth followed.

Conversely, every global recession in the past 50 years has been preceded by a sharp increase in oil prices.

Tyler Mordy, CFA, is President and CIO for Forstrong Global Asset Management Inc., engaged in top-down strategy, investment policy, and securities selection. He specializes in global investment strategy and ETF trends. This article first appeared in Forstrong’s Gobal Thinking feature. Used with permission. You can reach Tyler by phone at Forstrong Global, toll-free 1-888-419-6715, or by email at tmordy@forstrong.com . Follow Tyler on Twitter at @TylerMordy and @ForstrongGlobal.

Notes and Disclaimers

© 2017 by Fund Library. All rights reserved. Reproduction in whole or in part by any means without prior written permission is prohibited.

The foregoing is for general information purposes only and is the opinion of the writer. The author and clients of Forstrong Global Asset Management may have positions in securities mentioned. Commissions and management fees may be associated with exchange-traded funds. Please read the prospectus before investing. Securities mentioned carry risk of loss, and no guarantee of performance is made or implied. This information is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting or tax advice.

 
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