Oilmultis stock appearances are promising.
Costs related to oil and heating have seen a significant decrease once more. This is a positive development for motorists and consumers, but it's bad news for oil producers. However, the worst might be over for them, as their prospects are improving.
The price of Brent crude oil fell below $70 per barrel (159 liters) in September, which is a price that hasn't been seen since around three years ago. With fuel prices now being more affordable, drivers can breathe a sigh of relief, and filling up oil heaters at the beginning of the heating season won't break the bank.
At first glance, the low oil price seems unusual. After all, OPEC+ had planned to end the current production cut in the fall. However, they have now extended it by two months until at least December to support prices. Major OPEC+ countries like Saudi Arabia and Russia rely heavily on oil sales to finance their state budgets and therefore need higher prices. Less supply generally leads to firmer prices.
Another surprising aspect of the low oil price is that the US, which has the largest oil reserves in the world, often sees a fall in prices when supply exceeds demand, causing excess supply to flow into storage. However, the opposite is currently happening. Stocks are decreasing, which suggests a supply deficit.
There are several explanations for this unusual development. Firstly, OPEC's influence has been dwindling for years. The oil cartel now produces about as much black gold as it did in the early 1970s. While global demand has increased since then, so has supply, particularly from the US, which now exports oil due to fracking technology. Other countries, such as Canada, Brazil, Norway, and Guyana, have also increased their production. Together, they could increase their output by 1.8 million barrels per day by the end of next year, which is more than 1.5 percent of global production. In contrast, demand is growing by only about one percent per year.
Moreover, oil production in Libya could potentially restart, according to Bloomberg News Agency. The country has been divided into two since 2014, with the west and east disputing control of the central bank, which also manages energy revenues. This led to a temporary halt in oil production. If this is resolved, significantly more oil could flood the world market.
Weak demand from China
However, strong supply is facing relatively weak demand. Unlike the US, where the economy is still flourishing, China is grappling with persistent economic weakness. China is the world's second-largest oil consumer after the US. Declining property prices and tumbling stock prices on Chinese exchanges have led to notable financial losses among Chinese consumers, meaning they have less money for consumption. Less consumption also means less oil demand.
Trend reversal possible
However, the bottom for black gold may have been reached, and prices could start to rise again soon. After all, the US planned to refill its stocks at a price of $70 per barrel, which is roughly the current price of the WTI grade.
Additionally, the global economy is expected to grow by more than three percent this year, despite the weakness of the Chinese economy. This should also lead to an overall increase in demand. The peak of global oil demand has been predicted for years, but it has been increasing annually so far.
However, the additional supply is limited, especially for Western oil majors. Due to increasing regulations and bans, they have invested too little in the search and development of new reserves in recent years. Some of the money has flowed into renewable energies or to shareholders.
The large oil companies pay high dividends and buy back their own shares on a large scale. This makes them particularly attractive in times of falling interest rates, as bonds then represent less competition. This trend is unlikely to change in the coming years. The break-even point for Exxon, Chevron, and others is between $40 and $45 per barrel of oil. Even at the current price level, they generate substantial profits that they can distribute to their shareholders.
The 25,000 Euro Question
The distribution of larger sums of money, such as 25,000 euros, across different asset classes depends on the risk profile of the investor. Stocks offer the highest long-term returns but are more volatile than other investments. A share of 40 to 60 percent appears reasonable, diversified internationally and invested in dividend-paying stocks such as oil companies. Gold should be weighted at five to ten percent for risk hedging. Liquid assets, such as ten percent, should also be included to take advantage of potential entry opportunities during falling prices. The remaining capital can be invested in the bond markets.
About the Author: Michael Wittek heads the portfolio management at independent asset manager Albrecht, Kitta & Co. in Hamburg and is responsible for the investment strategy here.
This publication is for informational purposes only and for use by the recipient. It does not constitute an offer or solicitation by or on behalf of Albrecht, Kitta & Co. Vermögensverwaltung GmbH to buy or sell securities or investment funds. The information contained in this publication has been gathered from sources deemed reliable. However, Albrecht, Kitta & Co. Vermögensverwaltung GmbH does not guarantee the accuracy or completeness of this information and disclaims any liability for losses arising from its use.
Despite the current low oil prices, investment opportunities in oil companies could still be attractive due to their high dividend payouts and share buybacks, especially in times of falling interest rates. The break-even point for major oil companies like Exxon and Chevron is around $40-$45 per barrel, which means they can still generate substantial profits at current prices. Therefore, a share of 40-60% in international dividend-paying oil stocks could be a reasonable portion in a diversified investment portfolio with a risk profile of 40-60%.
