1. Over supply
2. Weakening demand
Reason number 1 is really the bigger reason rather than reason 2.
Supply will likely remain high, worsening the glut
- OPEC raises output limit despite record low oil prices, despite protests from struggling OPEC members (from 30 to 31.5m barrels/day, EXCLUDING Indonesia)
- Russian Energy Minister say output cuts "isn't viable"
- Russia's output is close to record level now
- Iran will bring more supply once sanctions are lifted in 2016, and its output won't be below pre-sanction levels, worsening the supply glut
Well really, except this time it's different.
Back in 2008, when demand plummeted due to the financial crisis, Saudi Arabia brought OPEC to cut production in a bid to lift oil prices. (read: supply cut).
At the same time, the central banks have been cutting interest rates and boosting the economy (read: demand catalyst).
Also, China in 2008 was growing at a faster rate than now, in 2015. Their demand for oil is much higher than 2015. (read: demand was higher back then).
And so, you could really see oil prices recovering within a year as there were really positive catalysts and actions that helped its recovery.
Yet, now, nobody is really doing anything to bring oil prices back up.
OPEC wants to defend market share.
Russia doesn't want to cut output.
If OPEC and Russia does cut output, US Shale oil supply will increase again when oil prices recover, bringing to status quo.
And we have Iran joining the oil glut situation. Hurray!!
Dangerous to assume
So, it is very dangerous to assume.
Assume that just because a stock is a blue chip, that it'll survive this oil crisis like how they survived 2008 (except the situation is vastly different).
Assume that just because its a blue chip, it's price will definitely recover. SMRT/Noble/NOL anyone?
We must therefore not simply assume. If we believe in a stock, believe so because we know that the management will be capable of driving the company out of this crisis.
Not just because it's a blue chip, or just because they've survived 2008.
Surviving 2008 doesn't mean will survive now
It all boils down to fundamentals.
Just because the 3 local telco survived 2008, does it mean that they'll definitely survive any subsequent obstacle?
But, back in 2008, there wasn't a threat of a 4th telco. Things were different.
Just because Sembcorp Utilities survived 2008, does it mean they'll remain equally profitable now?
But back in 2008, vesting contracts levels set by EMA was much higher than in 2015. Things were different.
So please, let us always remind ourselves to think about the fundamentals, and not simply generalise the situation and mislead ourselves.
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| Source: Bloomberg |
Yet, now, nobody is really doing anything to bring oil prices back up.
OPEC wants to defend market share.
Russia doesn't want to cut output.
If OPEC and Russia does cut output, US Shale oil supply will increase again when oil prices recover, bringing to status quo.
And we have Iran joining the oil glut situation. Hurray!!
Dangerous to assume
So, it is very dangerous to assume.
Assume that just because a stock is a blue chip, that it'll survive this oil crisis like how they survived 2008 (except the situation is vastly different).
Assume that just because its a blue chip, it's price will definitely recover. SMRT/Noble/NOL anyone?
We must therefore not simply assume. If we believe in a stock, believe so because we know that the management will be capable of driving the company out of this crisis.
Not just because it's a blue chip, or just because they've survived 2008.
Surviving 2008 doesn't mean will survive now
It all boils down to fundamentals.
Just because the 3 local telco survived 2008, does it mean that they'll definitely survive any subsequent obstacle?
But, back in 2008, there wasn't a threat of a 4th telco. Things were different.
Just because Sembcorp Utilities survived 2008, does it mean they'll remain equally profitable now?
But back in 2008, vesting contracts levels set by EMA was much higher than in 2015. Things were different.
So please, let us always remind ourselves to think about the fundamentals, and not simply generalise the situation and mislead ourselves.
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