Oil fell out of bed and that too was a very big fall. Five and ten percent falls in oil are not that uncommon but a 13% fall in one day is very rare. The leaders of China and the US have been trying to cap the rise in oil with limited success. But the latest news on a new COVID variant from South Africa has sent shivers through the markets fearing another major shut down and no travel.
Even before Biden took over office, we have a 100% track record on our oil calls. If you have any doubts, you are welcome to check my past reports. That doesn’t mean I will be right again. Probably, we understand oil a little differently and better than others.
Last summer, the Chinese government intervened in the domestic iron ore market. Iron prices had more than doubled from pre- Covid levels. The government stepped in May with investigations and inspections on producers and speculators. Since May prices are down 60%. In the same way, the Chinese government intervened in the domestic coal market as prices had tripled over a period of 12 months until Oct. Prices are now lower by more than 40% in just over one month.
In September, China made another move to stabilize oil prices by releasing oil from its strategic reserves, for the first time ever and what did prices do? Prices went up and not down!
What’s the difference? China is the biggest producer of coal in the world. With iron ore they are one of the biggest producers, the other being Australia. China has less control over the oil supply.
A few days back in an attempt to bring oil prices down, the US President announced that he will be releasing oil from the Strategic Petroleum Reserve. But will all these efforts keep oil prices down? I don’t think so. The structural driver for oil prices is the funding for new exploration and that has been effectively choked off. OPEC and its partners stand to benefit a lot until everyone is driving Tesla or any similar vehicles. That’s a long way off. The ‘Clean Energy Revolution’ is a global movement. During this transition, some countries stand to benefit a lot and others will pay for it. The producer will command and demand higher prices, especially in a lower competitive, lower supply world.
We think current levels in oil are good buying opportunities unless the world is going into a full lockdown again especially for oil stocks that have not caught up with other scrips.
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Abraham George is a seasoned investment manager with more than 40 years of experience in trading & investment and multi-billion dollar portfolio management spanning diverse environments like banks (HSBC, ADCB), sovereign wealth fund (ADIA), a royal family office and a hedge fund. Currently, he is setting up a hedge fund where foreign citizens can invest in Indian growth stocks like Tanla operating in hyper-growth markets like CPaaS.