20200331 Long oil, but prepare for long term battle

31 mar 2020

Oil prices continued to fall on 3/30. WTI prices once fell below $ 20 per barrel, hitting an 18-year low, and some market analysis even target at $ 10 per barrel. The current price level has appeared 3 times in the past 20 years, namely the recession after the tech-bubble in early 2000, the financial crisis in 2008, and the shale oil breakthrough in 2015 and 2016 and a slight economic slowdown. After these 3 oil price bottoms, as long as economic activity picks up, prices can rise quickly. There are many reasons for the plunge in oil prices in the market discussion. The main reason is that the economic activity freeze caused by the COVID-19 virus has greatly reduced demand. Meanwhile, Saudi Arabia and Russia have fought a price war to oversupply. Although it is impossible to predict where and when the bottom of the oil price will be, it is believed that there is a greater chance to success to long oil in the long-run. Here’s the reasoning: First, on the demand side, the economic lockdown imposed by the governments to contain epidemic will not last forever, the epidemic will eventually be controlled, and economic activities will be restored. On the supply side, although the price war between Saudi Arabia and Russia is fierce, the sustainability is limited. After all, the current oil prices are harmful to the economies and finances of both countries. As long as one of them cannot sustain, they will eventually return to the table. In addition, one said that Arabia and Russia were ostensibly engaged in a price war, but they actually conspired to destroy the US shale oil industry. The US knows this, so Trump has also expressed concerns about oil prices more than once. If the US intervention is successful, there will be an opportunity for oil prices to rise; if the intervention fails, US oil production will also drop sharply, and crude oil supply will naturally decline. In other words, in the process of dynamic adjustment, the excessive supply of crude oil will not continue forever, because it is not in the interests of all parties. Finally, in order to counter the economic impact of this epidemic, huge amounts of money have been flooded into the market by central banks. As long as the economic recovery is expected, huge amounts of money will always chase a small number of commodities, and crude oil is often one of the fast-responding commodities. In summary, the current oil price will not last forever, and the experience of the past 20 years shows that the current price provides a relatively high margin of safety and is a good long-term investment opportunity.
However, the strategy for investing in crude oil must pay attention to time and space risks. The time risk is the duration of the epidemic. If the epidemic drags on for too long, or if the epidemic causes the economy to fall into a longer recession, the response time for crude oil demand will also be extended. While investing in crude oil requires carrying costs, and the recent costs have increased significantly, we must pay attention to the impact of carrying costs on performance. In addition, the risk in space is that the current price fluctuates greatly. The downside risk is left to Wall Street analysts to shout casually. We cannot accurately predict where the lowest price will be, so we also need to assess the tolerable losses. Good luck to everyone!