At the height of the Corona crisis, during the last month of April, we experienced one of the trading days that any trader or investment manager who spends most of his time in front of computer screens will remember until his last day. A futures contract on the price of a barrel of crude oil, the raw material among the most important in economic existence as we know it today, is trading at a negative price. The trading systems went crazy, some of them didn’t even know how to display a price with the minus sign in front of it, they just weren’t designed for it.
To be precise, it is important to note that unlike contracts on financial assets traded on different exchanges, in which the clearing and settlement between the buyer and seller on the profit or loss generated by each party is purely monetary, a contract on an oil barrel has slightly different characteristics. Among other things, the contract holder undertakes to store the barrel of oil in one of the huge storage houses in the US and this is accompanied by a cost of a few dollars. $ 0- $ 10 per barrel Demand for oil at that time was low, when most of the Western world was in a quarantine of one kind or another.
A year and a half passed, the pharmaceutical companies developed vaccines, the various farms learned to live and operate in the shadow of the virus, and the demand for oil increased dramatically. Share a “occupied” demand that was waiting to erupt. Travelers refilling the fuel tank, trains, ships and planes returning to transport goods and goods and factories returning to production routine. All of these, along with a number of other surprising factors such as the shortage of transport drivers in some places and the flood disaster that has occurred in the last two months in the Shanxi region of China, where about a tenth of the amount of coal China consumes (a crude oil substitute) is produced. These factors led to sharp increases in the price of oil and its products up to levels of about $ 80- $ 85 per barrel. 8 times more than its price but a year and a half earlier.
A historical look teaches us that the world economies can allocate over time a certain and maximum rate of GDP as an expenditure on energy prices, before it weighs down and drags them into recession. It is customary to assume that this rate is 7% of GDP, a number which has been “achieved” in the last month. By comparison, last April when the price of a barrel was close to $ 10, energy expenditure accounted for only about 2% of world GDP.
This problematic situation befalls us before the onset of winter in the northern and populated hemisphere, a severe winter will entail a higher demand for energy for heating and heating purposes and may raise the price even higher.
It is important to note that the world does not suffer from a “real” shortage of energy sources. Many technologies developed in recent decades including oil shale production (pollutants, but that’s another topic), discovery of huge gas reserves, and the transition to energy from renewable sources, have increased the global energy supply in a way that should fix the world’s needs in abundance. In addition, a return to routine is expected to alleviate the bottlenecks and spot problems mentioned, and of course the market mechanism that will have to balance the price, which is today significantly higher than the marginal production price of a barrel. With a little help from the weather, the current episode in oil prices is also likely to pass, hopefully it will happen soon enough and not too late.
The information presented is provided by Kesem Group (hereinafter: “Kesem”) from Excellence Investments Ltd. (hereinafter: “Excellence”) as a service to readers for information purposes only and does not constitute a substitute for investment advice or investment marketing that takes into account each person’s data and needs. Guarantee of return or profit. The aforesaid should not be considered an offer or advice for the purchase and / or sale and / or holding of the securities and / or financial assets related to the information presented. The aforesaid should not be considered as complete and exhaustive information of all the aspects involved in the subject. Companies from the Excellence and Magic Group have an interest in the information presented. The aforesaid information is based on assumptions and may change from time to time. Mistakes may occur in the information as well as market changes. The data are correct at the time of publication.
The author is Chief Investment Officer, Magic ETFs