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Oil crash: a Citywire global perspective one month on

A month has passed since US oil prices briefly plunged below zero. Citywire editors around the world assess the impact of this historic event on their markets.

A month has passed since US oil prices briefly plunged below zero, amplifying the already big economic shocks from the coronavirus and the price war between oil producers Russia and Saudi Arabia.

Citywire editors around the world assess the impact of this historic event on their markets.

Click through the slides to find out more. To see all the slides on the same page, click here.

Next: United Kingdom

A month has passed since US oil prices briefly plunged below zero, amplifying the already big economic shocks from the coronavirus and the price war between oil producers Russia and Saudi Arabia.

Citywire editors around the world assess the impact of this historic event on their markets.

Click through the slides to find out more. To see all the slides on the same page, click here.

Next: United Kingdom

United Kingdom

Gavin Lumsden writes: ‘It seems like, “Oh, there’s some mystery to this,” but there’s not. It’s demand. There’s no demand,’ Anthony Grisanti, a New York trader told Citywire’s US office after crude oil’s brief but historic plunge to -$40.32 on 20 April.

The technical factors and storage problems that caused this unprecedented plunge may have passed. The US oil benchmark, West Texas Intermediate, has recovered to over $34 and its European counterpart, Brent, has reached over $36.

But the shock to investors has been real, particularly in the UK whose leading stock market index, the FTSE 100 is dominated by the oil and mining sectors. Royal Dutch Shell’s decision to cut its dividend for the first time since the Second World War has been the biggest shock in the £30bn tidal wave of dividend cuts that have engulfed British investors and the equity income funds and investment trusts on which they rely.

Next: Asia

Asia

Forecasters believe oil prices will recover further in the second half as China, the world’s largest oil buyer, lifts travel restrictions imposed when Covid-19 struck.

Tan Min Lan, Asia Pacific head of UBS’ chief investment office, told reporters she expects WTI and Brent could move to $40 and $43 a barrel respectively.

This will help countries like Malaysia, where energy accounts for about 20% of GDP. National oil company Petronas slashed its dividend payment to the government from RM 54bn ($12.4bn) in 2019 to RM 24bn ($5.5bn) this year, citing low prices. The Bursa Malaysia Energy Index has fallen significantly, with decliners led by Petronas-linked stocks.

A trend Thomas Taw from BlackRock iShares observed is that investors had been using oil exchange-traded funds (ETFs) and products (ETPs) for months to position for a bottom in oil prices. In particular, flows started piling in as the commodity started crashing towards the end of February; adding $13bn to crude oil global ETPs from February to the end of 19 April, with $2.2bn coming in the last week alone, said the head of Asia Pacific investment strategy, ETF and index investing.

With hopes rising that oil could make it past $45 before the year end some fund managers are seeing enormous opportunity in corporate bonds from countries in the Gulf Co0peration Council (GCC).  GCC bonds, which have been resilient in the midst of the coronavirus outbreak, have attracted the attention of Franklin Templeton, for example, which started buying the debt a month ago.

Audrey Raj, editor, Citywire Asia

Next: United States

United States

US fund managers say the present moment may provide real opportunities for differentiation. Rob Thummel, senior portfolio manager at Tortoise Capital in Kansas, believes the relative outperformers will be companies exposed to electricity-generating natural gas rather than travel-powering oil. He also thinks the midstream energy infrastructure companies – like Enterprise Partners and Enbridge – are good picks.

‘Given the lack of capacity, oil storage is very valuable right now,’ said Thummel, who co-manages the $2bn Tortoise MLP and Pipeline fund. ‘That presents an opportunity for some of these infrastructure companies to lease out existing storage facilities at higher rates.’

The stocks one might want to avoid? Oil services names, which rely on the continued hunt for new sources of oil.

‘We’re going to have rig counts continue to decline, which means declining demand for services’ Thummel said. In general, ‘highly levered commodity-sensitive names are not place to be for now.’

Drilling services provider Diamond Offshore filed for bankruptcy last month; its shares, which started the year at $7.30, have fallen below 20 cents.

Anthony Grisanti, an energy trader since 1984, said that those who are bullish on oil should look to the big integrated names, and should avoid speculating on the commodity itself. After all, as some amateur commodity traders may have painfully learned for the first time, losses in futures can be infinite.

Alex Rosenberg, editor Citywire RIA

Next: South Africa

South Africa

A collapse in oil prices always has significant ripple effects across the world. These impacts are often amplified in emerging markets like South Africa.

‘A lot of people are underestimating the knock-on impact that depressed oil prices are going to have on the global economy – both positive and negative,’ argued Nadir Thokan, chief investment officer at 27Four Investment Managers in Johannesburg. ‘The structural positive is that the terms of trade of countries like South Africa are going to be drastically improving and our inflationary outlook is going to be very benign into the medium term.’

This is because the country is a significant net oil and gas importer. Oil makes up more than 15% of South Africa’s total imports, which means that lower prices will ultimately be positive for consumers and the currency.

However, as a small, open economy, South Africa’s prospects are also closely linked to the overall global economy.

The shale industry in the US likely to suffer substantial bankruptcies and job losses as operations simply cannot be sustained at current prices. That is going to have significant repercussions across the US, which ultimately feeds into the global outlook.

‘The job losses we are going to see in the US will mean a slower recovery there and slower consumption,’ Thokan explained. ‘And that ultimately filters into confidence and company earnings.’

Patrick Cairns, editor, Citywire South Africa

Next: Goodbye ‘Planet Oil’

Goodbye ‘Planet Oil’

The Covid-19 crisis could spell the end for several sectors which don’t really have long-term futures, such as coal mining and heavily subsidised short haul air travels.

Liebreich Associates founder and clean energy expert Michael Liebreich spoke to Citywire director Richard Lander about what the outbreak means for natural resources and whether we are living in the final days of ‘Planet Oil’.

In this video, Liebreich, who formed New Energy Finance, also looked at whether we are nearing peak emissions and how lock-down initiatives globally have pushed us away from that unwanted summit... for this year at least.

Next: gold miners shine

But gold miners shine

While the dive in the oil price has hurt many investors, it has opened a golden opportunity for investors in mining equities.

Gold miners, where margins have been under constant pressure over the last two decades, have received a big boost, said Ned Naylor-Leyland, manager of the Merian Gold and Silver fund.

Naylor-Leyland believed this ‘awkward, unwelcome cousin’ at the party had the potential to be the ‘next big story in financial markets’. He said the operating environment for these companies looked as good as it had done for decades, with the market flooded with cheap oil for these energy intensive firms.

Meanwhile Invesco global market strategist David Chao was looking for signs of green shoots in China and the EU where lockdowns have been lifted, hoping that if transportation picked up it would buoy oil prices.

‘Oil is interesting because its spot prices are at a historical low and priced at distress,’ Chao said. ‘The bigger question of “when” spot oil prices will stage a rebound is less clear, although I don’t expect it come anytime soon.’

Dylan Lobo, editor, Citywire Wealth Manager in the UK

Next: Switzerland

 

Switzerland

‘If someone had told me that we would see overnight CHF -37.97-priced WTI oil I would have asked them what they were smoking,’ said Amaury Jordan, a partner at Zurich-based firm Avalor Investment, on 21 April. The night before, the price of oil had tumbled.

Among Swiss wealth managers, opinion about the consequences of the price slump remains divided. François Savary, CIO of Prime Partners in Geneva, said his allocations had not been affected, because he was not invested in energy commodities.

He also said he did not draw any conclusions about the effects on the market since the event concerns a specific sector.

‘As the Opec Plus agreement will come into force in May, I think that we should monitor oil prices per se but not so much in relation to the general markets,’ he said.

For Geneva-based Julien Jammet, portfolio manager at Pentagram Wealth Management, low oil prices often indicate sluggish economic activity ahead, potential difficulties for banks which are large lenders to the oil industry and more volatility for the financial markets. 

‘We expect to mitigate via more money allocated to gold and cash,’ he said.

Camilla Giannoni, editor Citywire Switzerland

Next: Europe

Europe

The oil question has got few answers from European investors but has opened several lines of enquiry. While many think it could open up opportunities in emerging markets, others see it as a clear sign that the future lies clearly beyond the traditional vestiges of fossil fuel.

European fund buyers at a (virtual) Citywire roundtable event last month argued that the case for holding little to no traditional energy was now proving the correct call. Thomas Sørensen, portfolio manager of Nordea’s Global Climate and Environment strategy, was among those who thought the oil collapse would hasten rather than halt an alternative switch.

This was echoed by investors with an emphasis on so-called real assets, as we heard how the move to impact funds, a huge trend across Europe, will see money flood into sustainable infrastructure. Whether this creates a surge in ‘stranded assets’ for oil majors remains to be seen.

Meanwhile the likes of Carmignac – a major French asset manager – believed the oil turbulence would have wide-ranging implications, not just for companies but geopolitically, warning investors to brace themselves. 

The group’s spokesperson and investment committee member, Didier Saint-Georges, said: ‘The problems with the shock, is the waves it creates’.

Chris Sloley, editor, Citywire Selector

Next: Germany

Germany

Germany is not exactly the place to be when it comes to oil. No big major is based here and raw materials fund managers are rare. One well-regarded investor, though, is Jochen Berlenbach, who comes from Cologne, but founded his fund boutique Earth Resources Investment Group in Zug, Switzerland. 

‘Brent oil could theoretically drop to negative prices, just like WTI,’ warned Berlenbach, whose Earth Exploration fund focuses on undervalued energy companies.

A further drop in demand or an escalation in the price war between Russia and Saudi Arabia are the big risks for Brent, which covers production from the North Sea and is the European benchmark for oil, he said. 

However, Berlenbach believed the production profile of Brent made it more flexible than WTI. He said most Brent oil producers used traditional, vertical drilling methods, making their oil wells easier to shut down than shale wells, which can suffer permanent damage from being closed. This means if storage becomes scarce like right now, companies can decide to stop pumping oil out of the ground. 

Currently Berlenbach doesn’t hold any oil companies in his fund. ‘We have to wait up until the demand picture changes,’ he said.

Serge Debrebant, editor Citywire German