On Friday, oil fell over 10%. That’s a pretty big, pretty rare move (14th largest ever, I think).
Omicron, the new COVID variant, is to blame for much of the speculative element, behind the fall, arguably quite justifiably, given last years negative oil pricing hasn’t been forgotten by anyone.
It was also over Thanksgiving, which means decreased market participant activity, which in turn can exacerbate price moves through low liquidity.
There was also a strong feeling of capitulation, given that oil’s momentum over the prior 5 weeks had been poor (levels are high, but rates of change are weak, as Brent dropped from $86 to a little under $80, breaching the 100 day moving average).
So, to a degree, a perfect storm.
We have quite a sizeable energy overweight, which will have felt nothing but pain.
Equally, we aren’t too fazed. The European / Asian energy crisis isn’t going away, and these short term acute price movements do much to discourage any potential increased supply response (e.g. US shale gas production) that might have been tempted by the recent high prices.
OPEC+ has scheduled meetings which now likely appear as catalysts to delay/defer/decrease any additional planned production.
Perhaps a final observation, big LNG projects, like Woodside’s Scarborough, are based off a long run price of $65bbl. They don’t need anything like $80bbl to make their target returns.
Still, no point pretending that the share prices will be anything other than bruised, for the near term, really, for as long as Omicron hangs around.
We’ve seen a few iterations of “frightening new variant” that didn’t come to much, and clearly it is too early to tell if Omicron meets the same fate.
But if it doesn’t, the usual mix of lockdowns, masks, and tweaks to vaccines should likely work their magic.
And if it doesn’t, well then, the 7% overweight energy bet is perhaps the least of our concerns.
Important Information: This document has been prepared by Aequitas Investment Partners ABN 92 644 165 266 (“Aequitas”, “our”, “we”), a Corporate Authorised Representative (no. 1284389) of C2 Financial Services, (Australian Financial Services Licensee no. 502171), and is for distribution within Australia to wholesale clients and financial advisers only.
This document is based on information available at the time of publishing, information which we believe is correct and any opinions, conclusions or forecasts are reasonably held or made as at the time of its compilation, but no warranty is made as to its accuracy, reliability or completeness. To the extent permitted by law, neither Aequitas nor any of its affiliates accept liability to any person for loss or damage arising from the use of the information herein.
Please note that past performance is not a reliable indicator of future performance.
General Advice Warning: This document has been prepared without taking into account your objectives, financial situation or needs, and therefore you should consider its appropriateness, having regard to your objectives, financial situation and needs. Before making any decision about whether to acquire a financial product, you should obtain and read the relevant Product Disclosure Statement (PDS) or Investor Directed Portfolio Service Guide (IDPS Guide) and consider talking to a financial adviser.
Taxation warning: Any taxation considerations are general and based on present taxation laws and may be subject to change. Aequitas is not a registered tax (financial) adviser under the Tax Agent Services Act 2009 and investors should seek tax advice from a registered tax agent or a registered tax (financial) adviser if they intend to rely on this information to satisfy the liabilities or obligations or claim entitlements that arise, or could arise, under a taxation law.