Investing in the Oil Industry – By Dr. Phil Osagie

Posted by admin Articles, Columnists, NNP Columnists, Oil Politics, Phil Osagie Wednesday, March 3rd, 2021

Dr. Phil Osagie | Toronto | March 3, 2021 – If you bought just one barrel of oil on April 21 last year, your returns would have now increased by over 60 times. Or if you had traded $1000 in WTI crude oil, you would be worth over $60,000 today. Imagine if in April last year, you had invested your savings of $17,000 in Crude, you would now have entered the millionaires’ club as your net-worth would have skyrocketed to well over $1million. Or an eye-popping N460 million!

Less than one year ago, crude oil price had spectacularly crashed to $1 per barrel. In fact, a day earlier, on April 20 Oil prices went into negative territory, and traders were paying money to get people to accept to take oil contracts off their hands. Oil was trading in a bloody red zone at -$37.63 in the New York international market.

What was the cause of this unprecedented “black swan ”event? It was the start of COVID-19. Oil tanks around the world were overfilled. Most countries were in a lockdown. People were driving less, industries were idling and planes were hardly flying. The situation was further worsened by the oversupply arising from the price war between Saudi Arabia and Russia. Demand for oil sunk to an all-time low and for the first time in history, a barrel of oil was cheaper than a bottle of restaurant Coke!

In less than 10 months, the oil story today is entirely different. Russia and Saudi Arabia both blinked and came off their high horses, and reduced oil production. OPEC, the Oil-exporting countries also agreed to cut production by 10 million barrels a day and gradually the price of oil started to rise.

With the Coronavirus still very much around, claiming hundreds of thousands of lives and also crushing businesses, no one predicted that oil prices will climb to new record levels so quickly.

As at February 14, oil had hit a 52 week high, trading at nearly $61 per barrel. Oil traders, market speculators and oil producing nations were not only celebrating love, they were also riding high on oil’s incredible bull run, driven by the vaccine optimism, the prospect of the $1.9 trillion coronavirus relief plan by the US Congress, as well as an inexplicable market exuberance.

Oil prices are usually driven by OPEC and Non-OPEC production, supply disruption,

OECD inventories, global oil consumption, international conflicts and Crude price reaction to world events.

Any threat to oil supply can easily lead to a spike in oil price. With the volatility in the Middle East oil belt, North Korea rattles and increasing terrorists’ bloody footprints, the world is not in short supply of geo-political tensions.

Though there are presently no major conflicts or trade crisis in sight, the oil market has remained surprisingly bullish and the bears are standing far away. According to the latest IEA Oil Market Report, global oil demand is expected to recover to 96.6 mb/d following an unprecedented collapse in 2020.

OPEC and Russian have also agreed to maintain the negotiated supply cuts, with Saudi Arabia pledging to an additional 1 million barrels/day supply reduction. This proactive production restraint will prevent a global oil stock surplus and keep the upward pressure on prices.

Savings or Squandering?

The question that then arises is not where oil prices are heading, but where the money from the latest oil boom is going. Will most of if be saved or will it be squandered?

The question is indeed worth asking as oil is a finite resource. Most counties will run out of oil within the next 50 years. According to a Yourbudgit report, Nigeria for example will run out of oil in about 44 years, based on proven oil reserves of 37bn barrels and daily oil production of 2m barrels.

At $1.1 trillion, Norway has the largest sovereign wealth fund in the world from its oil savings. The sum is 2.5 times the country’s annual GDP.

Kuwait has saved up $592 billion, Qatar $320 billion while Angola has $8 billion. Abu Dhabi with a population of 1.2 million people has amassed $683 billion in its Sovereign Fund, while Nigeria with a population of over 200 million people has a comparatively paltry savings of $1.55 billion.

How long this oil price rally will run is hard to predict. The resumption of talks with Iran and the prospect of additional Iranian supply to the global marked could put a downward pressure on prices. But this has not yet happened and global prices have already notched the record level of nearly $62 p/b.

The oil market will remain as slippery as it’s very name implies. For now, oil

producers and traders are simply savoring the price boom while it lasts. It is however essential they remember to sleep with one eye closed and reflect on Confucius philosophy and life caution that, “when prosperity comes, do not waste it.”

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Phil Osagie is a strategic thinker and global content & PR Adviser

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