Oil has bottomed – Financial Terrorism is Over!

Yes we are sticking our neck out and are drawing a line in the sand.

The world always overshoots and fear mongering (Financial Terrorism) is drawing to an end, in the energy space.

Here is why!

First – The Saudi Factor

In September of 2015, a Bloomberg article stated that at $50 oil prices, the Saudi’s were running a $107 billion budget deficit.  This estimate was put forward by the International Monetary Fund.   At current levels – mid $20s as of the current data, this number is likely materially higher.  For residents of Saudi Arabia, some must be asking, how low can it go?  

This is impossible to know, but the pain being felt by the Saudi’s is like any nation.  When the noise gets loud enough, and the consensus says we’ve had enough, change is imminent.

Source: VIP Wealth Solutions and Bloomberg

Additionally, there has been some chatter that super large money pools have accelerated the degree of fear and price decline that the world is feeling.  How does this happen? This is what we are calling financial terrorism.  This is for sure and for certain, a conspiracy theory. However, it is completely rational thinking when you look at the data and understand human emotion, in terms of when it comes to irrational versus rationale or logical decision making.  The world is now worried that oil will go lower. Let’s quickly revisit the historical price change for some context. The chart below shows the price change over the past 30 years. Yesterday, January 20, 2016, the price of West Texas Intermediate hit $26.19 around the same time the DOW Jones Index was down around 550 points.

Then we had a rally cry on our desk at that turn, as we thought the world had finished puking and we heard the dry heaving that typically signals that the sickness or virus has finally left the body.   Sorry for being graphic, but we think you know what we mean.

Source: VIP Wealth Solutions and Bloomberg

For fun (we can all appreciate some humour, especially in times like these), we put the current price of oil in context. Consider the following:

We’ve all heard the saying, “Price is what you pay, but value is what you get”.

For those in energy commodities, this next demonstration of price/value could be seen as the bottom.

In the United States, an oil barrel is defined as 42 US gallons, which is about 159 litres or 35 imperial gallons.

At the lows today (January 20, 2016), WTI hit $26.19 USD, WCSB (Canadian Oil) was $12.93 USD.

For comparison, Norway, one of the most expensive countries to live in, a litre of water is about $2.25 USD. On a barrel of oil equivalent, that means water would be priced at $357.75 USD per barrel.

A 2 litre bottle of Coca-Cola in Canada is $2.50 CAD. If we use the current USD exchange rate to compare, that’s about $1.75 USD, on a barrel equivalent, that’s $278.25 USD.

A 4 Litre bag of milk in Canada is $5.99 CAD, again using current FX, it works out to be $4.10. On a barrel equivalent, that’s more than $650.00 USD for a barrel of milk.

So in recap, per barrel for the following fluids:

Milk                 $650

Water              $350

Pop                  $275

Oil                    $26.19

 

Really, we are not making this up.  (Well we made up the numbers for comparison purposes).

This comparison demonstrates the irrationality of comparative pricing.

Radicals have entered the forecasting business.  Yes, this is true. We are now hearing estimates for the near term price of oil of below $20 and $10 long term, future prices.  Why stop there:

-  How about zero? Wait, let’s get really crazy and start paying people to take this black stuff off of our hands.  We have lots of it so I think it would be a good idea to just pay people to take it away.

- Wait we can call this business 1-800-Got-Oil.

Okay, we are now ranting at the irrationality that happens at inflection points. It is very dark right now and the end is near.

Where and when does the final shoe drop? This is a tough one to answer.  However, there are a number of potential surprises.  Are you ready for the surprise? When the world wakes up one day, something is going to happen. There will be a geopolitical issue. The Saudi’s will cut production, and there could be a coordinated effort to settle or create price stability,

or something similar.  But when this happens, the moves will be dramatic.  Consider looking back at the 2008/09 decline.  Many who look in the rear view mirror remember this as one of the greatest buying opportunities of our lifetimes.  Today, another one could be sitting right in front of us.

Oil has bottomed.

Hedge our comments……

The opinions expressed in this report are the opinions of the author and readers should not assume they reflect the opinions or recommendations of Richardson GMP Limited or its affiliates. Assumptions, opinions and estimates constitute the author’s judgment as of the date of this material and are subject to change without notice. We do not warrant the completeness or accuracy of this material, and it should not be relied upon as such. Before acting on any recommendation, you should consider whether it is suitable for your particular circumstances and, if necessary, seek professional advice. Past performance is not indicative of future results. Richardson GMP Limited is a member of Canadian Investor Protection Fund. Richardson is a trade-mark of James Richardson & Sons, Limited. GMP is a registered trade-mark of GMP Securities L.P. Both used under license by Richardson GMP Limited.