Turmoil in the Oil Market

The oil industry experienced a highly turbulent few months from last time we wrote about it, back in April. The ongoing and prolonged events created more uncertainty in the global market which in turn, added unwanted tumult. There are various factors that normally affect oil prices such as changes in the US Dollar currency, production and inventory supplies, OPEC decisions and actions and the global economy and deals.

These are all key hurdles that affected this commodity. The ongoing Brexit uncertainty, whether US-China tensions escalate, as well as the US Fed decreasing by another 25 basis points the interest rates all had their toll on the oil price. Moreover, October 31st was the deadline for the UK to leave the EU which now was granted an extension that takes this event to hopefully being finalised on January the 31st. Another direct impact on the oil industry occured earlier this year in June, when President Donald Trump signed an executive order to increase sanctions on Iran. Meanwhile, the market is filled with anxiety over America’s concern of China’s actions in Hong Kong which is perceived to be a cause of a de-rail in trade talks.

Taking into consideration the latter and uncertainties around whether a possible US-China trade deal signing at next month’s APEC meeting in Chile, the Fed may repeat their data-dependent approach. That may undermine aggressive easing bets, sinking the S&P 500 and along with it, the sentiment-linked commodity. On balance, the risks seem tilted to the downside for crude oil prices in the week ahead. These developments triggered sharp movements in global equity markets, a decline in global oil prices and higher capital outflows from the emerging economies. As the trade disputes threaten to become even more pervasive, the global growth outlook has darkened.

Having said this, there were signs of progress between the US and China which resulted to a stability in oil prices. All this resulted from the US stating that they are close to completing phase one of the trade deal and Beijing complimenting these reports by stating that parts of the text of the agreement are basically completed.

Trade negotiators from the two countries “agreed to properly resolve their core concerns and confirmed that the technical consultations of some of the text agreement were basically completed,”  China’s Ministry of Commerce said in a statement on Saturday. Presidents Donald Trump and Xi Jinping are seeking to sign a pact in Chile next month.

Despite a recent uptrend in the oil prices, the current levels are still around 12% off from those of April this year. US Energy Secretary Rick Perry was interviewed last Sunday stating that the “Global markets are awash in crude thanks to the surge in US output, and the boom looks set to continue.” Complimenting this statement was ING analysts Warren Patterson and Wenyu Yao who wrote that if a trade deal is struck for phase 1, this should lead to an improved sentiment. In fact, from April this year to October, Brent oil dropped from $72.80 to $61 per barrel.

Last week President Donald Trump’s comments on invading Syria’s oil supply did not help the stability of this volatile commodity. The U.S. President’s suggestion on Sunday that Exxon Mobil or another U.S. oil company operate Syrian oil fields drew rebukes from legal and energy experts. “What I intend to do, perhaps, is make a deal with an ExxonMobil or one of our great companies to go in there and do it properly … and spread out the wealth,” Trump said during a news conference about the U.S. special forces operation that led to the death of Islamic State leader Abu Bakr al-Baghdadi.

In turn oil prices affect a country’s growth. In one article from the Associated Press the International Monetary Fund reported that political uncertainty and volatile oil prices are hindering economic growth, especially in the Middle East. Furthermore, an intensification of the trade conflict would fuel greater uncertainty in the global environment, leading to an increased probability of firms postponing or cancelling investment plans. Coupled with softening global demand and country-specific issues, recent data reveals that investment growth has slowed sharply in many developing economies, including Mexico, the Republic of Korea, South Africa and Singapore.

Furthermore, large companies such as Exxon Mobil Corp, Royal Duch Shell, Chevron and so on, are all expected to disclose around 40% plunge in their third quarter results – resulting from an 18% decline in crude oil prices. This means that executives need to explain the situation as investors would demand higher dividends and payouts for compensation on being exposed to higher risk.

With expected slumping energy prices looming, due to a predicted excess supply in 2020, an investor who would like to invest in this sector should consider adopting a monthly plan in either a specialised fund or an ETF. ‘Buy low, sell high’ is a famous statement in the financial world. While market timing is nearly impossible, it is evident that when markets go through a negative patch, investors tend to stay away from most risky assets, ignoring their investment objective at the outset. But what about cost averaging – a strategy used by long-term investors to take advantage of different market cycles in order to boost their investment returns. That way the individual can benefit from purchasing units at different prices and smoothening out the initial cost.


Matthew Miceli Donnelly, ICIWM, B.Com Banking & Finance & Management (Melit.), B.Com (Hons.) Management, MBA (Melit.), is an Investment Advisor at Jesmond Mizzi Financial Advisors Limited. This article does not intend to give investment advice and the contents therein should not be construed as such. The Company is licensed to conduct investment services by the MFSA and is a Member of the Malta Stock Exchange and a member of the Atlas Group. The directors or related parties, including the company, and their clients are likely to have an interest in securities mentioned in this article. Investors should remember that past performance is no guide to future performance and that the value of investments may go down as well as up. For further information contact Jesmond Mizzi Financial Advisors Limited of 67, Level 3, South Street, Valletta, on Tel: 2122 4410, or email [email protected]