Oil Price is a Distraction for Value Investors

There I said it. The recent plummet in oil price has caught the attention of many. Its precipitous fall has fuelled the negative sentiment in the markets, as oil price is now perceived to reflect the state of the global economy. But I believe, unless you are looking to invest into the oil and gas sector, oil price is a mere distraction. Any obsession over  it cannot be productive.

Oil price is the outcome of two distinct causes

There are two reasons why oil price is at 13-year low, 1) Supply glut as OPEC nations seek to drive out shale producers and 2) Economic weakness in China lowering the demand for oil.

The OPEC factor is a policy decision which is an entirely human-manufactured. It is not based on any fundamental weakness and it happens that its implication is lower oil prices. Unless you are a net importer nation, or an upstream producer of oil, it is hard to imagine why you would fret over cheaper oil. Quite simply, lower prices in an important factor of production such as oil means lower production costs overall.

On the economic situation of China, it is a fundamental weakness. However, lower oil prices are the effect of said weakness, not a cause. Why bother about oil prices then? What you should be looking at is the economic numbers of China.

All in all, the oil prices we see is a function of these two distinct causes which have very different fundamental reasons, even if their effects happen to be the same. Logically, their net effect (oil price) is hardly useful in drawing any insightful conclusion.

Coffee table banter

Oil 1

Looking at how major news publications have been covering oil prices, it is difficult not to be drawn into the cycle of negativity. Remember, they could very well cover the benefits of low oil prices for economies, instead of the doom and gloom that we see today. Remember, journalists are equally susceptible to groupthink and biasedness. And remember, oil price makes for interesting coffee table banter and only that.

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About the Author

SG Value Investor
I developed my passion for investment management especially equity research at a relatively young age. My investment journey began when I was 20, at a point in time where markets were still recovering from the Global Financial Crisis. My portfolio started from money I saved over the past years and through working during the holidays. I was fortunate to have a good friend with common investing mentality to began my journey towards value investing. To date, we still research and invest in companies together, discussing valuations and potential risks of a company. To date, I manage a fund with a value investing style. Positions are decided upon via a bottom-up approach or smart speculation (a term I came up with when buying a stock for quick profit due to a mismatch in prices in the market due to takeovers/selling of a subsidiary or associate). Apart from managing my own portfolio, I enjoy sharing my research with family and friends, seeking their opinions and views towards the stock. Reading Economics in London, I constantly keep up with the financial news in Singapore & Hong Kong. Despite my busy schedule, it has not stopped me from enjoying other aspects of life. I enjoy a variety of activities in whatever free time I may have – endurance running, marathons, traveling, fine dining, whiskey appreciation, fashion. Lastly, I enjoy meeting new people, discussing ideas and gaining new perspectives towards issues in the world.

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