Who gained from tumbling crude prices?

Monday, 3 June 2019
Adelaide, Australia
By Bernd Struben

  • Further falls ahead…
  • Negative rates ahead
  • ‘China’s Chilling Tiananmen Square Admission’

Regular readers will know I like to bang on about oil.

Maybe that’s because my wife’s family all stem from Texas. And my brother-in-law is hip-deep in the oil and gas business out in Durango, Colorado.

But I mostly enjoy forecasting oil prices because the market tends to signal what you can expect well in advance of major price moves.

Now, that’s true with all commodities, to some extent. But the shale oil revolution that’s swept across the US has changed the game.

With a flood of oil always lurking behind the scenes, forecasting the next oil slump mostly requires getting the price target right. And then waiting for crude to overshoot it.

As I’ve written here many times, I see the 2019 price range for WTI crude in the US$50–60 range. Any higher than US$60 presents an opportunity to short oil. Meaning, you’ll gain if the price of oil falls and lose if it rises.

But oil bears didn’t need to worry about losing money from rising oil prices over the weekend.

West Texas Intermediate (WTI) crude is down 10.5% since I last wrote to you on Thursday. A short seller’s dream.

There are all sorts of ways you can short a commodity like oil. My preferred method is via exchange traded funds (ETFs). You can buy and sell these on stock exchanges just as you do shares in a company.

The ETFs that bet against a commodity’s price rising are called inverse ETFs.

There are numerous inverse oil ETFs you can choose from. Some are leveraged, carrying the promise of bigger gains alongside the threat of heftier losses.

Here’s what I wrote to you about that on 14 May, when WTI was trading for US$61.14:

The ProShares UltraShort Bloomberg Crude Oil ETF [NYSE:SCO], for example… seeks to give you returns equal to three times the moves in the price of crude.

If you predict the next move correctly, this can really juice your gains. But be extra cautious when investing or trading using leverage. Just as SCO could triple your gains, it could also triple any losses.

The ProShares website notes this ETF “should be avoided by those with a low risk tolerance or a buy-and-hold strategy”.

Now, I don’t make official recommendation in Port Phillip Insider. But I do like to throw out investment ideas that you can further research on your own.

Below you can see the one month chart for SCO, with 14 May marked near the centre:



chart image
Source: Google Finance
Click to enlarge

As you can see, SCO closed up 11.7% overnight. And the ETF has now gained 31.7% since 14 May.

Which leads me to ask: Did you do any further research and take the plunge into SCO?

Drop us an email at letters@portphillipinsider.com.au and let us know why…or why not.

We’ll get back to oil’s outlook right after the markets…

Markets

Over the weekend, the Dow Jones Industrial Average closed down 354.84  points, or 1.41%.

The S&P 500 closed down 36.80 points, or 1.32%.

In Europe the Euro Stoxx 50 index finished down 37.72 points, or 1.14%. Meanwhile, the FTSE 100 lost 0.78%, and Germany’s DAX closed down 175.24 points, or 1.47%.

In Asian markets Japan’s Nikkei 225 is down 263.25 points, or 1.28%. China’s CSI 300 is down 0.17%.

In Australia, the S&P/ASX 200 is down 60.85 points, or 0.95%.

On the commodities markets, West Texas Intermediate crude oil is US$52.73 per barrel. Brent crude is US$60.96 per barrel.

Turning to gold, the yellow metal is trading for US$1,308.91 (AU$1,885.22) per troy ounce. Silver is US$14.63 (AU$21.07) per troy ounce.

One bitcoin is worth US$8,740.01.

The Aussie dollar is worth 69.43 US cents.

Further falls ahead…

At the current price of US$52.73 per barrel, WTI is trading nicely within the US$50-60 range I largely expected for the year.

But that doesn’t mean it can’t temporarily fall lower…a lot lower…from here.

First, there’s the US.

Record US crude production is only set to increase over the next four years. Even if the Saudis manage to keep OPEC+ in line and extend the current production cuts into the second half of 2019, US producers are going to keep on pumping. The higher the oil price, the more they’ll pump.

But OPEC+ — which includes Russia — is looking increasingly fragmented. Thanks largely to Russia.

Here’s an excerpt from what I wrote on 15 May in Port Phillip Insider:

The Russians, for one, are signalling that they’re ready to increase output…

Russia can pump oil profitably at far below today’s prices. They also have the capacity to pump an extra 300,000 barrels per day (bpd)…or more. Even at US$50 per barrel, that’s $15 million per day. A big pile of money to leave on the table for the cash strapped nation.

Since agreeing to scale back its oil output by 228,000 barrels per day from its October levels, Russia has met its pledge only once. That was for the month of May. And it was only delivered due to contamination issues with Druzhba, Russia’s predominant oil pipeline to Europe. Those issues should be resolved over the coming days.

Perhaps with that $15 million daily figure in mind, the Russians are now waffling over the already planned date for the next OPEC+ meeting.

From Bloomberg:

The regular half-yearly OPEC meeting is now scheduled for June 25, with a gathering of the bigger OPEC+ group the following day. That’s a bit late to discuss the future of a deal that’s due to expire four days later, as it will take at least a month to implement any changes.

But now even that has been thrown into doubt.

Two weeks ago, most OPEC+ ministers met in Jeddah, Saudi Arabia to assess the output deal and make recommendations for the June meeting. But things didn’t quite go according to plan. [Russian oil minister Alexander] Novak, who signed up to the original schedule, seems to have a more pressing commitment and wants the date changed.

If the Russians don’t play ball and OPEC fails to keep a flood of supply from reaching the market, we could see WTI retesting its US$42 per barrel level last hit on 24 December.

That will see some higher cost US producers coming under pressure. Any announced production cuts from the US would likely be enough to send oil back into the US$50–60 range.

And so, the hamster wheel turns.

Before signing off for today, a quick peak into the future…

Negative rates ahead

The Reserve Bank of Australia (RBA) meets tomorrow for its next decision on interest rates.

The last time the RBA moved rates was on 3 August 2016. At the time they cut the cash rate from 1.75% to 1.5%. It’s remained untouched at the record low 1.5% since.

Analysts are almost unanimous in their belief the RBA will lop another 0.25% off that record low rate tomorrow. If the herd is right, that will mean a new record low 1.25% cash rate for Australia.

While that’s still a positive return in nominal terms, it’s already negative in real (inflation adjusted) terms.

That’s not good for savers. And it’s not meant to be.

Instead, any rate cuts are meant to get you spending, borrowing, and spending more.

Will it work?

Maybe in the short run.

But long-term, the RBA’s fuel tank is dangerously low.

Gone are the days when it was able to knock off 3.75% from the cash rate in a series of four cuts over five months (September 2008–February 2009). That’s what you can do when you start out with a 7.0% interest rate.

Once you start plumbing the depths of 1.25% or even 1.0% to keep the economy ticking along and the housing market afloat, you know you’ve got troubles.

But why face them now if you can kick the can down the road?

Will the RBA cut interest rates tomorrow? Should they? Let us know your thoughts at letters@portphillipinsider.com.au.

Finally, here’s the latest from The Australian Tribune:

‘China’s Chilling Tiananmen Square Admission’

If they did it once, they could…and likely would…do it again.

Those are the chilling conclusions drawn from Chinese Defence Minister Wei Fenghe’s defence of China’s bloody crackdown on protesters around Beijing’s Tiananmen Square 30 years ago.

That’s something to keep in mind when you hear that Australia should...’

If you’re fed up with sanitised, politically correct dogma cut and pasted from one mainstream source to another then The Australian Tribune is for you.

And it’s absolutely free.

Sign up here to get The Australian Tribune delivered free to your inbox five days per week.

You can visit our website at https://www.theaustraliantribune.com.au/ to read the complete article above now.

Cheers,
Bernd