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Oil: A Slippery Business

So the markets traditional plan of drifting into the Christmas period merely squaring off positions and battening down the pnl for year end while enjoying a hazy fog of Christmas hangovers hasn’t quite worked out this year.

The action has been been firmly focussed around the dramatic fall in oil prices in the latter half of this year…

Oil Prices 2014


Investors (particularly the income/dividend investors that tend to visit UTMT) should bear in mind that despite this near halving in the price nobody can point to exactly why the price has fallen so dramatically. Unlike a simple equity like Tesco it’s not quite so easy to provide a clear reason or argument why oil is tumbling. THere are simply too many political and economic factors at work that affect the price to be able to state exactly the cause of the fall.

So the best I can offer is a couple of [wild[ theories of my own….

1. It all about screwing Russia

An obvious conspiracy theory to jump to is that the West (well more precisely America) is orchestrating a scenario to do serious harm to the Russian economy as revenge for Putin’s invasion of Crimea and actions in Ukraine. How?

Well the US of A have had a long and complicated history of political relations with Saudi Arabia. Perhaps America has called in a favour from the Saudi’s to keep the OPEC oil taps open, forcing down the price of the black stuff in an attempt to further hurt Russia, above and beyond the formal economic sanctions imposed.

USDRUB in 2014


The above graph of RUBUSD is clear evidence that the Russian economy is under severe pressure. Two thirds of Russia’s exports come from oil and gas so as oil prices tumble, so too does the Rouble and Russia economy.

The most recent spike in the above chart comes despite the announcement yesterday by the Russian Central Bank to increase interest rates from 10% to a whopping 17%. The RCB must have sat around their conference table with a horrible sick feeling deep in their stomachs when the rouble tanked another 10% despite their hike in rates. I can’t imagine it was long before Vlad was on the blower asking what the f$ck was going on….

Vlad On The Blower

If direct sanctions weren’t hurting Russia then there can be no doubt that the collapse of oil prices and the Rouble will/are. Perhaps the next game we’ll be watching is how much of their $400bn foreign currency reserves the Russians will spend defending the rouble.

2. It’s all about screwing America

According to Forbes’s sources oil has to fall below $60 a barrel before US shale becomes uneconomic. Well, is it a coincidence that the oil price has just dipped down to $59? After all US/Saudi relations aren’t quite what they were a few years ago.

It’s been reasonably well documented in recent years how the US has expanded it’s shale gas industry which in turn has had the effect of reducing it’s dependency on oil and gas imports. Perhaps this recent squeeze on prices is in fact designed by the Saudis (along with the rest of OPEC) in order to hurt the US shale industry, perhaps force it out of existence and there by reducing OPECs competition.

Perhaps the Saudi’s are keen to have the US maintain it’s vested interest in the Middle East (oil) and keep the US as a key military ally in the region. As long as the US needs Middle Eastern oil, it’s likely to continue to interfere in the region politically and militarily.  If this is what the Saudis want, then ensuring the US needs to import its oil from OPEC seems like a good strategy.

3. All of the above

Of course the recent crash in prices might just be the natural market reaction to the generally bad economic situations in the worlds biggest economies. China is undeniably slowing down, the US and the rest of the West is struggling to find any sustained/substantial growth that isn’t funded by more debt.

Russia seems intent to shoot itself in the foot and the Middle East is a mess as usual. So in general not many growth prospects about mean oil prices have naturally fallen to where they belong.

What Does It All Mean

Commodities markets tend to be amongst the most volatile and the recent price action proves this. It wasn’t that long ago that the political instability between Russia and Ukraine had us all worried about interruptions to oil/gas supply for this winter and fearing increased prices. As described above the situation has changed dramatically since then.

Back home the likes of BP, Shell and other commodity companies have taken a battering over recent months and pulled the FTSE down too. Of course BP has additional issues relating to its stake in Russian company Rosneft and it’s seemingly endless compensation liabilities in the US.

Both BP and shell are now trading on trailing dividend yields of over 6% which could turn out to be a great entry point if you believe the recent sell of was driven primarily by politicians and not economics.

Of course these spiralling prices are welcome news to those of us that live in the sticks and use heating oil to heat our homes…

2014 Heating OPil Prices

While the world gets in a spin of oil my annual argument with Mrs UTMT about what temperature to set the thermostat to becomes a little easier to lose!

PS: If you want to read up on the history of oil and the ways in which is has caused and been used to affect some of the major moments in history I can thoroughly recommend reading The Prize by Daniel Yergin. It was about the only book on my university reading list that I ever read. I think I’l be dusting it off and giving it another read over the festive period.

Disclaimer: I’m no expert in US/Saudi relations, commodities or the inner workings of Vladamir Putin’s obviously troubled mind!

{ 4 comments… add one }
  • underscored December 17, 2014, 2:33 pm
    • Under The Money Tree December 17, 2014, 5:32 pm

      Thanks for the link…a very interesting view on the current situation.

  • UKValueInvestor December 17, 2014, 4:02 pm

    A lot of investors are definitely panicky. It’s not all doom and gloom with some companies that buy oil related products doing okay, and as a sticks-based buyer of heating oil I’m about to fill up the tank for almost half what it cost a few years ago. Bonus.

    • Under The Money Tree December 17, 2014, 5:24 pm

      I made the mistake of filling up our oil tank 3 years ago during that deep freeze we experienced, I dare not look up how much I paid a litre! I’ll definitely be taking this opportunity to fill the tank up once prices fully filter through to the oil delivery companies.

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