At the start of the week, we were talking about the oil price potentially turning negative. Naturally, we’re now ending the week with the oil price rocketing higher.
So what happened in a week – and is this the turn for the oil price?
At the start of the week, everyone was talking about the oil price turning negative. There was so much oil hitting the market that all the storage space that could be found was being filled to the brim. As Tom Holland of Gavekal points out, so much of the stuff is being stored in stationary oil tankers right now that “charter rates for tankers have doubled and doubled again in the last month."
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
It costs money to shut down an oil well and then restart it up. So in theory, you could get to the point where oil producers were still better off pumping the stuff out and paying someone to take it off their hands.
Thus the idea that you’d get negative oil prices.
Now we are in a pretty serious situation. Vast chunks of the global economy have shut down and we’re still not sure if and when it’ll reopen for business (Singapore has just gone into full lockdown now apparently, which makes the whole “this’ll pass in a few months” idea look a little less hopeful).
Meanwhile the Saudis and the Russians chose this point to declare an oil price war (which to be fair, if their goal is to wipe out US shale production, this is the best time to give it a crack).
So it’s hard to envisage a more drastic scenario for oil prices.
Why oil shot higher yesterday
That said – when you’re talking seriously about what is still one of the world’s most valuable (as in necessary, rather than price wise) commodities being literally given away by producers, you have to wonder about where we are sentiment-wise.
When everyone is tilted to one side or another in a market, the fundamentals don’t really matter – it really doesn’t take very much to drive prices in the opposite direction. And that’s what happened yesterday.
President Donald Trump tweeted that he’d spoken to Saudi Arabia and that the Saudis had spoken to the Russians, and that they were planning to cut production.
His specific line on the amount of production was somewhat far-fetched (ten to 15 million barrels a day), so as with most of Trump’s tweets, the news was worth taking with a pinch of salt. And Russia promptly denied any such discussion (also worth taking with a pinch of salt, of course).
However, Trump is set to talk to the US oil industry today – maybe he’ll be softening them up to cooperate on any discussion of cuts. And on Monday, the Opec-plus cartel (ie, Saudi Arabia and Russia) are planning to meet up virtually to discuss cuts. So we may well be at the point where the all out “pump and be damned” phase is passing.
The oil majors look like they’ve seen a bottom
So what happens now?
The oil price has managed to hold on to a good chunk of the gains it made when it rebounded on Trump’s tweet. Will it go much higher from here? Your guess is as good as mine. The demand picture remains incredibly ugly, so it really depends on the supply side.
When we get to the point where no one will take the oil off producers’ hands, you have to bet that they will cut production. So it seems unlikely that there won’t be some sort of agreement on production cuts on Monday.
That isn’t likely to make the sort of difference that would send oil a lot higher from here. But it might take negative prices off the table. And given the massive negativity in the sector there’s probably more risk on the upside than on the downside.
As Holland puts it, for producers, “while the coming quarters will be extremely painful, they will not be fatal.” Some US shale producers will go to the wall, but some hedged their production at much higher costs and could even benefit now.
So what’s the upshot for you as an investor? The more stabilisation in oil production we see, the more likely it is that the big players – the oil majors – won’t need to cut their dividends.
That in turn makes the likes of Shell and Exxon etc. look more appealing. They have rebounded solidly from their lows but if you’re holding or considering buying, it’s still one of the sectors I’d still feel relatively comfortable about investing in at this level.
We have more on oil prices in the latest edition of MoneyWeek magazine – get your first six issues free here.
Until tomorrow,
John Stepek
Executive editor, MoneyWeek
-
Revealed: how much you need to earn to afford a house in the UKNews The average UK salary is £20k too low to afford the country's typical house price - we look at just how much you need to earn to step onto the property ladder in the UK
-
Revealed: the countries with the most generous pensionsThe UK state pension is often criticised for failing to deliver a comfortable retirement. So, how does our pension system compare to other countries - which countries are most generous, and at what age can you claim a state pension?
-
Halifax: House price slump continues as prices slide for the sixth consecutive monthUK house prices fell again in September as buyers returned, but the slowdown was not as fast as anticipated, latest Halifax data shows. Where are house prices falling the most?
-
Rents hit a record high - but is the opportunity for buy-to-let investors still strong?UK rent prices have hit a record high with the average hitting over £1,200 a month says Rightmove. Are there still opportunities in buy-to-let?
-
Pension savers turn to gold investmentsInvestors are racing to buy gold to protect their pensions from a stock market correction and high inflation, experts say
-
Where to find the best returns from student accommodationStudent accommodation can be a lucrative investment if you know where to look.
-
Best investing appsWe round up the best investing apps. Looking for an easy-to-use app to help you start investing, keep track of your portfolio or make trades on the go?
-
The world’s best bargain stocksSearching for bargain stocks with Alec Cutler of the Orbis Global Balanced Fund, who tells Andrew Van Sickle which sectors are being overlooked.
-
Revealed: the cheapest cities to own a home in BritainNew research reveals the cheapest cities to own a home, taking account of mortgage payments, utility bills and council tax
-
UK recession: How to protect your portfolioAs the UK recession is confirmed, we look at ways to protect your wealth.
