OPEC vs USA in Oil Crisis

OPEC vs USA in Oil Crisis

The recent sharp decline in oil prices has a devastating effect on Bursa Malaysia. Many, many stocks are now staring at 52-week low or new 52-week low in a space of two months. Yet in the beginning of the year until end of September and towards October, many stocks were trading near a new 52-week high or around there.

What causes oil prices to drop so sharply? Only a couple of months ago, nobody would have believed that oil prices would be selling at around US70 per barrel, especially during the conflict between Ukraine and Russia. At that time, many were fearful of oil price surging higher in the event the conflict turned into a full scale war with possible, other countries joining in to support Ukraine. Thankfully, the Ukraine-Russia conflict is not that severe as it seem to be.

So what caused oil prices to drop to this new five year low price? According to some reports, it is the ramping up production of shale oil by US due to their drillers becoming more efficient. Production per well was projected to increase in fields in North Dakota, Texas and Colorado.

The current production of shale oil grows 65 percent in the past five years to the highest level since 1986. The International Energy Agency said technological and organizational improvements that have enabled faster drilling rates, greater drilling density and higher new-well production have all been important to maintain production even in the face of increasingly steep decline oil prices.

However, there is a production cost for US shale oil drillers to break even.  It varies from drillers to drillers. According to Morgan Stanley, the break-even cost for producer Eagle Ford varies between US30 to US$60 per barrel. But most U.S. tight-oil reserves break even from US$60 to US$80.

A bi-monthly Malaysian business magazine published that the average cost is US55 per barrel from the U.S. producer. This means that as long as oil price stays above US60, shale oil will continue to be sold, thus competing with crude oil from OPEC countries.

Major crude oil producer Saudi Arabia is currently engaged in the price war with shale oil export US. Saudi Arabia can afford to even allow oil price to drop below US40 per barrel, but it remains to be seen if the US shale oil producers can withstand that price or beyond it.

Four of the world's largest economies countries, the United States, Japan, China and India are actually enjoying this unusual phenomenon of cheap oil prices. Cheaper energy will fuel their industries and economies and create a healthy growth from these largest economies and this should be a boon to global economic growth.

But the falling oil prices affects mainly emerging economies which are net exporters of oil or very dependent on oil revenues to finance the growth of their economies.

Malaysia is unfortunate to be caught in this declining price war situation as Malaysia is an oil exporter although some said Malaysia is actually an oil importer. Nevertheless, the declining oil prices has caused many oil and gas related companies to see their share prices dropping massively, thus causing an overspill into so many other counters.

Another factor is the depreciating ringgit against the green backs. A weakening ringgit also weakens the stock market, one way or another.

Investors or retailers or fund managers or who so ever simply sold down their shares. Strong good fundamental companies are suddenly painted in one master stroke with other "not-so-strong" companies and sold down every day and all the way.

Suddenly a few volume of 15,000 shares can cause a share price to drop by as much as 20 sen. Suddenly, many investors who hold fundamental stocks were dismayed by their declining "paper wealth". Suddenly in a space of two months, many investors who invested in the early parts of 2014 are staring at losses instead as the year comes to an end!

So for the stock market to recover back, oil prices must rebound back to the around US100 level. Will it rebound? When will it rebound? How much will it rebound? Will it stay there should it rebound back? See, these are all important questions that everyone is concerned to know.

Personally, I am not an economist. I am just like the ordinary guy who reads and try to understand the current oil crisis situation which affected the ringgit and the stock market.

But I like to offer my personal opinion that oil prices will not likely go down much further to as low as US40 per barrel because at the price, shale oil producers from US would not find it profitable  and attractive enough to drill and produce anymore.

Population growth continues and this will spur demand for oil from oil imported countries. China for one is now the number one customer for Saudi Arabia's crude oil.

Crude oil or shale oil are natural resources that cannot be simply produced by other raw materials. Hence, it is a resource that can be depleted over a period of times.

In fact, some analysts and research house are forecasting oil prices to bottom out in a matter of times and rebound back to the pre-levels soon. Should it happens before Christmas, share prices of most beaten down stocks are also likely to rally back especially those fundamental oversold companies.

Buying 4,000 shares of

Thong Guan Industries Berhad

at RM1.86 on Dec 12, 2014.

Today, I have started to accumulate quality and fundamental stocks with strong business and also paying reasonable good dividends as well. Another preferable criteria is that the buying share price should be trading to its near or new 52-week low rather than the other way round.

The risk of buying shares at near 52-week low is lower than at near 52- week high. But the reward is higher if one buys at near 52-week low and prepare to even average down.

The 52-week high of Thong Guan is RM3.10 and its 52-week low is RM1.83. Based on my purchase price of RM1.86, I am buying at its near 52-week low, hence my risk is not that great anymore.

Thong Guan is one such company that is cash-rich and has a sound fundamental business.

Thong Guan is principally engaged in investment holding activities, and trading of plastic and paper products. The Company's business segments include plastic products, food and beverages, and consumable products and machinery.

I shall be posting my buying contract note in my next blog, hopefully before Christmas. Cheers! Life is still wonderful and colourful despite the declining shares prices.