Oil and other commodity issues
Updated: Mar 10, 2020
Discussions have been occurring over the last few weeks regarding oil production by OPEC member nations to control prices for the benefit of producing nations. Over this last weekend, discussions broke down and Saudi Arabia began increasing output which is putting downward pressure on oil prices. As of 3pm on March 9th most oil services equity prices are down 30-50% as an oil price in the low 30's per barrel is prohibitively low for many oil producers.
Commodity prices tend to decline in recessionary periods. As supply chains globally slow down manufacturing due to slow downs caused by fears around COVID-19 (coronavirus) we have begun to see reduction in many baskets of commodities. Precious metals appear to be the only commodity group that is holding its value in this panic. This makes sense as precious metals are often a go to in times of heightened fears. We dont believe in precious metals as a long term asset class as there is limited to no income potential in the long run. However, we are evaluating all options as variables change to ensure client portfolios are structured to protect against downside risk while leaving room to take advantage of the panic.
Decreasing commodity prices including oil create many positive effects. On the one hand reduced oil and commodity prices may help consumers. Lower costs of gasoline, natural gas, as well as steel, copper, aluminium etc can allow consumers greater purchasing power. Alternatively, areas that depend heavily on energy related businesses may suffer if prices stay this low for an extended period. Most analysis shows that the bulk of US oil producers have a break-even cost around $25/barrel. As the price of oil decreases, production may be reduced leading to job reductions in the field. All of this is only likely if prices stay low and are anticipated to stay low for long periods.
There should be greater clarity on where commodity and oil prices are headed over the next 2-4 weeks. As always, we will be keeping a close eye on those markets and we would suggest you contact your financial professionals to see how this may affect your particular portfolios.