THE TURNAROUND IN OIL PRICE THAT NO ONE WAS ABLE TO PREDICT

04/2016-

When news of the highest crude stocks from the Department of Energy  since the Great Depression flashed on 1st week of March 2016, many traders and experts were in for a great surprise – oil prices rose thereafter instead of falling, as it had been for the past 2 years.

In fact, oil prices had continue to advance and dumbfounded analysts and traders and much to the chagrin of so –called “experts” which again never saw it coming.  US Brent, the international crude benchmark, in fact continued to advance a phenomenal 55% from its US$27.10 low to hit its recent high of US$42.

So what was it that cause the sharp turnaround?

To me, I watch the Big Elephant in the room closely – Saudi Arabia.  The latter who is the largest exporter of oil and stocks the highest excess oil stockpile, finally attempted to talk to Russia to freeze oil production levels, nevermind, if that was at January’s 2016 production levels. The excess glut will take time to sort itself out.

Secondly, the other key elephant – the US shale industry which had contributed hugely to the glut, is finally showing insipient signs of a slowdown.  US crude production, which has jumped from 5.4 million bpd in April 2010 to 9.7 million bpd in April 2015, finally registered a decline in almost 8 years in December 2015.  The latest figures continued to show a downtrend.

Steadier oil prices have also helped stemmed the sell-offs in commodities.  Iron ore, copper, zine and aluminium all had one of their best months in a while.  For example, iron ore prices has shot up almost 30% to $55 a tonne, a rebound once again, not predicted by any “experts”.

Locally, the Siamese-oil twins of Keppel Corporation and Sembcorp  Industries also staged remarkable recoveries – Keppel which fell 29% in Jan and Semcorp Industries which fell 21% in Jan, recovered 22 - 26% in their share prices to mid-March.

I have taken this opportunity to trim my positions in them.

While I view the current reprieve as a possible turnaround in the long arduous drop in oil price.  I do not expect a sharp turnaround to continue without a pause. However, the following would be key events in helping one to decide further –

1.  The upcoming April 17th meeting between OPEC and non-OPEC members.  Key issues would be Iran’s production level and production freeze agreements.

2.  Next month’s DOE report which I hope will continue to echo the downtrend in US shale production.

In the meantime, other than watching the Siamese-oil twins, I have started to see and meet managements of Offshore companies to sieve-and-smell the better companies among them to play the broader recovery in a bigger way, later in the year.

Never a dull moment - Happy Trading the oil and marine sector for the strong-hearted and deep-pocketed.