Opportunity - Issue 94

ENERGY
where oil prices are volatile and likely to languish close
to $40 per barrel.
GEOPOLITICAL RAMIFICATIONS
The shake-up of the oil sector will have a variety of
geopolitical ramifications. It is still too early to establish
how this will play out, but some macro consequences
are becoming clearer.
Firstly, OPEC’s influence should wane. As the energy
transition away from fossil fuels gains momentum and
the array of economically viable and less price-volatile
energy sources continues to emerge, oil’s dominant
position in the energy mix will decline. OPEC’s ability
to set prices and thus extract geopolitical bargaining
power will diminish. Conflict in the Middle Eastern
arena, however, could escalate. New power blocs
backed by Chinese or Russian interests will replace US
involvement and look to exploit Arab nations and assert
power in the region.
Secondly, Sino-Russian relations should deepen
on the back of this oil crisis. Their partnership is an
outcome of their shared dissatisfaction with the US –
both feel antipathy towards the US and its perceived
___ __ ___ __ _ _
Oil has caused wars,
assassinations,
man-made disasters,
coups and still affects
every person in
the world today
___ __ ___ __ _ _
meddling in their sovereignty and interests. Russia has
already become one of the biggest recipients of Chinese
investments under the Belt and Road initiative. The oil
war has complicated Russia’s prospects for economic
growth, but its alignment with China could deliver early
benefits as the latter’s economy recovers first from the
Covid-19 fallout.
THE UNCERTAIN PATH TO OIL PRICE RECOVERY
The oil price is a factor of demand and supply. On the
supply side, there is now significant excess capacity in
oil and related-product inventories due to the Covid-19
pandemic. This excess must be absorbed before product
prices can recover. At prices below $45 per barrel, oil
supply is largely in the hands of the OPEC-Plus oligopoly.
At higher prices, higher-cost producers such as the US
onshore fracking industry can restart production.
Oil demand is normally correlated with the global
economic cycle but is now fraught with uncertainties
thrown up by an entirely new set of factors. These include
how quickly economies can rebound from lockdowns,
whether working from home becomes the new normal
and whether wary office workers avoid public transport
to favour self-driving. Bigger influences include the
timing and extent of the recovery in global travel and
tourism, the accelerating adoption of electric vehicles
and how the global logistics supply chain is affected
by de-globalisation, reshoring and the establishment of
new supply lines. Many of these decisions will be made
by politicians.
Uncertainty relating to supply and demand will,
therefore, result in a volatile period for oil prices and
oil-related investments. So, while an oil shock of this
nature offers investors rare buying opportunities, they
should proceed with caution.
___ __
Mike Townshend,
Fund Manager,
Foord Asset
Management
Foord Asset
Management is an
owner-managed
boutique built
on the principles
of investment
stewardship.
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