While investor sentiment appears to remain fragile, it seems as though the worst of the market sell-off may now be behind us. Oil has bounced off recent lows, however it still trades at US$33 a barrel, well down from its 2014 peak of U$115 and in today’s daily we discuss just how cheap oil prices have become. All else equal, NZ Refining (NZR) benefits form a lower crude oil price, and NZR share have performed strongly in recent times (+18.5% since Sep 15) and are held in our NZ model portfolio.
Oil, Cheaper than KFC
The oil price has fallen over 70% since 2014 and now sits at around US$30 a barrel. A number of factors have contributed to the price decline, but ultimately an oversupply issue problem has been the major catalyst of the selloff. The US is relying more on fracking and OPEC has refused to cut its production. Demand simply hasn’t been able to keep pace with the additional supply and pure economic dictates that lower prices were needed to find an equilibrium.
believe that oil prices may be nearing a bottom. Although excess inventory will mean prices take some time to rebound, it difficult to see oil remaining depressed over the long run. Russia already appears that it may be ready to discuss production cuts with OPEC. After months of insisting it was happy to keep pumping at full throttle, recent comments by Russian officials has suggested that may be open to compromises with OPEC. A reduction in production would be a significant step to addressing the oversupply issues and a massive boost to the oil outlook.
Given then glut of financial information that is available, it is often easy to lose perspective of what the numbers really mean. thought it may be useful to compare the price of a standard 55 gallon (208 litres) barrel of oil verses a number of household expenditures to give some perspective of how cheap oil really is. At current levels, a barrel of oil (AU$41.80) is fractional cheaper than a KFC Giant Feast Pack (AU$41.95), while the barrel the oil comes in is worth almost 2.5 times as much as the oil it stores.
Chart of the Moment
NZ Refining (NZR.NZ) is New Zealand’s only oil refinery, and all else equal, benefits from a lower crude oil price. It has been a perfect storm for NZR as the falling NZ dollar has been a major tailwind for the stock, while at the same time the oil price has fallen and refining margins have remained solid. This has seen the share price rebound since the start of 2015, and we have captured +18.5% of the rally in the NZ model portfolio.