“The price of oil can remain at high levels”

– Oil close to maximums again…

The truth is that the last two events related to crude oil have not exactly contributed to relaxing prices, quite the opposite…

The veto of a large part of the oil that the EU receives from Russia has meant a significant boost in its prices, which has led it to exceed 124 USD/barrel in Brent Oil Futures, despite the fact that the agreement reached by OPEC+ to increase production above what was established at the beginning of the year, which became known later, managed to moderate prices slightly at first, but by not providing any confidence, (in the market it is understood that supply will not be able to satisfy demand of oil, because we are approaching the summer period, dates of rebound in demand, with inventories in the US, moreover, at low levels…), it has remained at high levels…

At the moment there are not many reasons that make us think that it can drop drastically from these levels…

– Why does the OPEC+ agreement arouse so many doubts? Shouldn’t it have helped to relax the market?

Many attribute the geopolitical tensions between Russia and Ukraine as the most important, or at least immediate, cause of the rise in the price of crude oil in recent months. In the short term it is, but the truth is that there are also other underlying reasons that impact the rising price of crude oil.

Both the main producing countries and the world’s most important oil companies have spent years refusing to make the necessary investments to maintain the rate of production, even increase it at critical times like the present. In recent years, the widespread commitment of politicians and governments to green and alternative energies has largely caused this reaction on the supply side.

The situation worsened with the outbreak of the coronavirus pandemic. The halt in economic activity was such that futures came to trade in negative, something that had never been seen before…

Since then, demand has recovered much sooner than expected and now consumption (about 100 million barrels per day) is very close to pre-pandemic levels, while supply has not followed this movement. And it has not done so so much because of the aforementioned lack of investment as because of the will of OPEC, which has taken advantage of the situation to bring prices to extremely profitable levels for them and although they have recently made the decision to increase production, they are not He is certain that they can (or that they want) to fulfill it…

The US has tried in recent months to approach countries like Venezuela, Iran and in recent days with Saudi Arabia, but the truth is that only Saudi Arabia and the United Arab Emirates could have the real capacity to increase production, pumping more oil, and offsetting the fall in sales by Russia…

However, even so, doubts persist regarding the ability of OPEC + to compensate for the estimated drop in Russian production (which could fall between 2 and 3 million barrels after the EU sanctions), although Saudi Arabia and the United Arab Emirates decided to try to fill that gap… And many are already thinking of crude oil at levels of 140-150 USD/barrel…

– How does the price of oil affect the markets?

It is evident that oil is one of the most important raw materials that affect the global economy, since 80% of the energy consumed involves the combustion of fossil fuels, adding oil, coal and natural gas.

In just over two years, the price of Brent crude, the benchmark in Europe, has gone from a low of just over 19 dollars per barrel to above the level of 120 dollars, at a rate of rise so fast and vertical that it is not It had been seen since the summer of 2008, when in one year the price of a barrel reached 140 dollars, threatening to put even more pressure on inflation and endanger the economic recovery.

To all this situation we must add the one generated by the tension in Eastern Europe, with the Russians playing their cards to “soften” any sanctioning decision by the US and the EU.

Unfortunately, this conflict threatens to have a more prolonged impact on the markets than previous ones, especially due to the possible persistence of the rise in the prices of raw materials, which would have negative consequences on some more than worrying inflation figures.

Bearing in mind that a barrel price above 100 dollars raises inflation forecasts by about half a percentage point in Western economies, and that, according to Moody’s, for every 10 dollars that oil rises, the pace of GDP growth reduced by a tenth, the picture is not at all rosy.

That said, it is clear that the price of crude oil has an impact on the global economy, but it is not easy to quantify it more or less exactly by industry and sector. Obviously, we can conclude something similar with respect to the correlation that the price of oil would have with the stock indices and its evolution… it really does not have it….

The most obvious effect of a high price of crude oil is the increase in production costs of companies, in transport costs and from there there is a transfer to the prices of the entire chain of production and distribution to the final consumer .

But of course, what is bad for some is good for others and in this case the companies related to the oil sector benefit, since the product being more profitable means that deposits that were not profitable before are now profitable, that the extraction companies invest in them and that auxiliary companies benefit from it.

It is no coincidence that so far this year, of the twelve most profitable companies on the Spanish stock market, we find one oil company (Repsol) and three companies related to the auxiliary industry (Tubacex, Técnicas Reunidas and Tubos Reunidos).

It also happens that other types of companies not directly related can benefit from a situation like the current one, as is the case of those related to alternative or renewable energies (Solaria, Grenergy Renovables and we could include ENCE).

However, we could not establish the existence of a correlation between the price of crude oil and the stock market, because the economy as a whole is tremendously complex and depends on multiple factors that affect it, the future of companies and the behavior of their quotes and the price of oil is just one of those factors, very important, yes, but not the only one.

– How can an individual invest in oil? How can you have “oil” in your portfolio now?

As in other cases, it is not possible to make direct investment in the raw material, but there are many alternatives…

The simplest would be the purchase of shares in an oil company listed on world stock markets…

In general, all the companies grouped in the sector are interesting and have good fundamentals and good recommendations, but we can stand out among the Americans ConocoPhillips and Exxon Mobil and among the Europeans, why not… Repsol.

It can also be done through ETFS such as USO or DIG (or through CFDs of these products…).

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