The crash lays the foundation for the boom, and vice-versa. The oil price decline over the last two years was one of the most substantial ever recorded and surprised even highly experienced industry experts. Barely ten years ago, almost everyone was worried that we would soon see the end of cheap oil. It seemed unavoidable that 100 dollars a barrel would be the new price floor, and there were projections of prices as high as 150 to 200 dollars and even more. But a fundamental rule of market economics is that the best cure for high prices is high prices (because this provides producers with an incentive that will create additional supply), and the best cure for low prices is low prices. The oil market is a prime example of this. The record prices above 140 dollars in 2007/2008, the ultra-cheap money from the central banks, and improved extraction technologies caused a veritable boom in new oilfield projects, especially in the USA. Today, not even a decade later, the industry is suffering from quite a hangover. Instead of the hoped-for astronomical profits from the “black gold”, some companies have gone bankrupt. But the good news is that the low prices will also cure themselves for the most part over the long term.
The red ink is flowing. Because at current prices, many producers around the world are not even able to cover their expenses, let alone generate a profit. Production and cost cuts are on the rise. But the most drastic factor for the long term is the enormous investment cutbacks in the industry, which amount to several hundred billion dollars. Many planned projects would be equivalent to burning cash at current oil prices, any many companies had to do an about face from expansion to survival. But the effects of this decrease in investment will not have a real impact on production figures until 2018/2019. Now, this is not playing a major role in the prices of oil and energy equities. The focus on the markets now is the current excess supply and the bursting stockpiles. There is little talk any more of a rapid, strong recovery that many were predicting in the spring of last year...
… and pessimism is the order of the day. As is often the case on the financial markets, many players are simply projecting the current situation into the future. And they therefore assume lasting low oil prices. Arguments for this can be found, of course. For example, some note that any time prices rise substantially, additional shale oil from the US will immediately come onto the market. At the same time, technical advances will further reduce the extraction costs for shale oil, making numerous projects feasible that previously would not have paid off. After the end of the sanctions, Iran will gradually return to the market. And finally, oil stockpiles are currently overflowing. Our long-term view is not so pessimistic.
Fundamental outlook better than the current sentiment. The arguments above are likely to steadily lose traction. No one denies that a sustainable increase in oil prices is highly unlikely as long as the stockpiles are full. But the conditions for a successive reduction of stocks are currently being created. Supply and demand have already moved much closer together, and further supply cuts are in the works. Efficiency gains from technological advances will be very limited in their scope in future, and we have already seen the greatest benefits. We have also likely already reached the peak of shale oil extraction, and the supply from these wells will decline again in the coming years. Then, the production declines at conventional oilfields that we have already seen for some time will become all the more relevant. The investment stop noted above will seriously exacerbate this effect. The gradual return of Iran to the market has already been priced in for the most part. But the risks of sudden production drops in the Middle East have not. It seems that everyone has gotten so used to the precarious political and military situation over the past years that the risks of a major regional conflict are largely underestimated.
Investing in selected energy equities. As is the case for all financial market movements, the development of the oil price can hardly be predicted over the short term. But fundamental factors dominate over the long term. In our view, these are pointing to higher oil prices than the market consensus projection, even if we will not see a return to prices of 100 dollars per barrel and above for some time. Investors could profit from this especially through selected energy sector stocks. Even relatively moderate increases in the oil price – provided that they are lasting – are enough for these stocks to post gains. This would noticeably improve the earnings of these companies and would also boost investor expectations, which are at least as important. The long-term efficiency gains from the current cost cuts would be an added bonus. This could make it worthwhile for forward-looking investors to consider Raiffeisen-Energie-Aktien (Raiffeisen-Energy-Equities). this fund offers the opportunity to profit from sustained higher oil prices over the long term once these boost the profits of energy companies. For example, money saved today in power bills or at the petrol pumps could be turned into future wealth. The risk/return ratio for energy equities is better than it has been in a long time. Over the long term, rising oil prices and higher energy stock prices are more likely than the opposite based on the fundamental driving factors. But there is of course no guarantee for this development, as always on the financial markets. Continued high volatility in the oil price is probable, and prices can decline further at any time. Which means that capital losses are also possible.
Assessments and positions are valid at the time that this document is released and may be changed at any time without prior notice. These are not projections for the future development of the financial markets or the mentioned funds. Loss of capital cannot be ruled out.
The fund exhibits elevated volatility, meaning that unit prices can move significantly higher or lower in short periods of time, and it is not possible to rule out loss of capital. As a part of the investment strategy, it is possible to invest to a significant degree (with regard to the related risk) in derivatives.
This is a marketing material of Raiffeisen Kapitalanlage GmbH. As of May 2016
The published prospectuses, information for investors pursuant to § 21 AIFMG, and customer information documents (Key Investor Information Documents) for the investment funds of Raiffeisen Kapitalanlage-Gesellschaft m.b.H. are available in German at www.rcm.at (and for some funds the customer information documents are additionally available in English) or, if the fund shares are sold abroad, in English (if applicable in German) or in your national language at www.rcm-international.com.