In one of our articles last year we spoke about the thrilled roller-coaster ride in the oil industry and the volatile rush it will bring. This week, the ride just got adrenalized, so buckle up and make sure you are safely strapped in. Just six months after the United States shocked the oil markets by letting Iranian exports continue, the Trump card was played by addressing its decision to end sanctions waivers that allowed oil shipments. This was another ace up Trump’s sleeve which is also set to echo across the four corners of the globe – it is a bullish surprise for the market.
The Trump administration announced last Monday that it will not renew exemptions from its sanctions to buyers of Iranian crude oil after they expire on May 2. It marks a change in direction from November last year, when Trump granted waivers to eight importers, as it sought to temper fuel prices ahead of American mid-term elections. This resulted in oil prices surging by around three per cent, a five-month high price level.
“This does bring a lot more uncertainty in terms of global supplies,” Petromatrix analyst Olivier Jakob tells Reuters.
Bloomberg reported the statistics on the amount of oil imported from some major countries. These included China – whose oil imports tallied to as much as 360,000 barrels a day, India imports around 300,000 barrels per day, and South Korea which imports 200,000 barrels per day.
The article also published Japan’s shipping data, which shows that for the month of March 2019 alone, the country imported 108,000 barrels per day, while Turkey imports around 60,000 barrels per day. The most affected by these sanctions could be the Asian countries, as these face being cut off from the American financial system, if they continue to purchase Iranian crude oil.
If crude oil continues to go higher, currencies of import-dependent countries may weaken, and inflation can accelerate. This move is intended to further tighten sanctions against Iran and flatten Iranian oil exports.
“This decision is intended to bring Iran’s oil exports to zero, denying the regime its principal source of revenue,” the White House said on Monday. In an interview with Joe McMonigle of Hedgeye Risk Management, an investment research and online financial media company in the US, he argued that these sanctions will put pressure on Iran and the oil markets.
According to statistics gathered by Bloomberg, Iran’s exports in March totalled to around 1.3 million barrels a day, while daily shipments were as high as 2.5 million barrels, in April last year. Hence it is understandable that Iran opposed these sanctions, and in return they are threatening to close the Strait of Hormuz, a vital gateway for seaborne oil shipments between the Persian Gulf and the Gulf of Oman, between Iran and the UAE and Oman. The Iranians are also threatening to congest supplies further in a market that is already facing supply disruptions from other countries such as Venezuela, Libya and Nigeria. This year’s rally in global benchmark Brent crude oil is above $70 a barrel. Prices are still below the four-year highs of over $86 they hit in October, before the US issued its waivers last year. Higher oil prices could weigh on economic growth and send share markets lower.
It is a fact that oil sell-offs are usually due to one of two reasons - changes in expectations regarding global growth and developments in the oil industry. In my opinion, this particular sell-off has more to do with the oil industry than the fear of a global slowdown or recession.
Primarily, this is because of the eagerness of major oil suppliers, such as the U.S., to produce and pump more oil in the market coming at a time when higher interest rates, a strong dollar, high levels of household and corporate debt, and trade frictions are all present in today’s market.
Hence, all these factors lead to the slow down in global growth and oil demand. “The interest rate hikes in the US and the end of QE in EU will put a brake to growth...,” said shipping expert and a member of the Greek Chamber of Commerce, Theophanis Matsopoulos. Could this be Trump’s royal flush hand to make America great again? If so, this could be another huge boost for his next presidential campaign.
With the current state of the global economy, the terms diversification and asset correlation comes to mind. Having exposure in different types of sectors could be beneficial for the investor. When investing in the oil industry, the investor has to keep in mind the risks this type of exposure brings – among others, default risk and concentration risk.
However, when investing in commodities, an investor can benefit from the fact that these type of assets can act as a hedge against inflation. This is because commodity prices tend to rise in line with inflation. The negative correlation between commodity assets and bonds and shares is that the latter assets tend to suffer with inflation – hence the benefit of diversification. I would suggest that if an investor would like his overall portfolio to be exposed in this type of sector, the investor should invest his funds in a multi-asset fund that has exposure to a number of underlying assets, or through an exchange traded fund that tracks a number of oil and gas industry companies, thus reducing concentration risk and ultimately default risk.
This article was prepared by Matthew Miceli Donnelly, 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 2122 4410 or e-mail matthew.micelidonnelly@jesmondmizzi.com