Saturday, 4 June 2016

Potential rise in Crude Oil price! Is there an opportunity to invest for Malaysian investors?

Over the past couple of months, price of Crude Oil per barrel experienced a huge surge in value from an all time low of USD26.20 (11th of February 2016) to the range of USD48 - USD50 as of end of May 2016. Shown below is the price movement of Crude Oil between 31 Dec 2015 till 31 May 2016:

Crude Oil price movement between 31 Dec 2015 to 31 May 2016
Despite the recent movement, price of Crude Oil is still at a level that's far from pre-2014 range of USD100+ per barrel.

Crude Oil price has got a long way to go

What caused the upward movement of Crude Oil price between April 2016 to May 2016?
Several key events which occurred recently have caused a dip in production of Crude Oil. Most significantly is the various attack on energy infrastructure by militant group in Nigeria. This has lead to a 36% fall in production of oil in Nigeria.

Militant attacks at Nigeria
Wildfires which blazed through the oil sands hub Fort McMurray at Canada is also another leading cause of shortage in supply of Canadian crude.

Canadian Wildfire
Three factors that could possibly drive Crude Oil prices higher

Factor 1 : Militant threat at Nigeria will continue to cause disruption to Nigeria's production
As recent as 31st May 2016, the militants are threatening more attacks on oil production facilities in retaliation of recent military attacks on them. This article from clearly highlights further bloodshed is to be expected. 

Attacks will continue!
Factor 2 : The Saudis has pledged not to raise output despite the recent production shortage
In the latest OPEC meeting which ended on the 2nd of June 2016, Saudi Arabia, the second biggest oil producer in the world has pledge not to flood the oil market with extra barrels. In all honestly, I believe this pledge made by the Saudi Kingdom is largely correlated with Factor 3.

Top 15 Oil Producers
Factor 3 : Saudi Arabia's Aramco IPO
This is the biggest push factor for Crude oil price to rise. Over the last two years, Saudi Arabia has strive to maintain oil prices below USD40  by flooding the market with oil in order to kill off rival American fracking industry which produces shale oil. However the plan seemed to have failed as majority of US shale producers have a break even price that are below USD40 per barrel.

Shale break even price by county
Having the planned backfired, the Saudi Kingdom is itself hurting profusely as a result of low oil prices which are leading to budget crunches and domestic austerity such as soaring prices of gas and water.

As a result of the above, Saudi Arabia recently announced Vision 2030 with a mission to make its economy less dependent on oil. One of its key move is to sell a piece of Aramco as part of an IPO to raise funds and pay for the launching of new industries which are non oil related.

Saudi Aramco is the largest O&G company in the world in terms of revenue
In order for the Aramco IPO to be successful, the Saudi Kingdom has to whatever it takes to move oil prices higher. That includes cutting oil output and making peace with oil enemies as stated by this excerpt taken from the Forbes.

Crude oil price - Up, up and up!
According to Khalid Al Falih, Saudi Arabia's oil minister and chairman of Aramco, the IPO scheduled in 2018 would consist of less than 5% of Aramco.

An opportunity for Malaysian to invest? 
With Aramco's IPO scheduled in 2018, there's an opportunity for passive investment overa a period of 1 to 2 years. This is banking on possible initiatives from the Saudi Kingdom to bring up the price of oil again.

Crude Oil Price vs Saudi Arabia Oil Production
In addition, cheap oil prices has led to an increase in demand for oil. This was observed when oil prices started to fall from USD60 per barrel in the 2nd Quarter of 2015 and global demand for oil started to rise during the same period. 

Rise in global oil demand 
The rise in global oil demand is also the very reason why price of crude oil shot up recently when production disruption occurred at Nigeria and Canada. In summary, demand for oil exceeded the sudden shortage in supply, leading to rise in prices.

Using unit trust as a passive option for oil investment?
While majority of investors tend to go for Oil and Gas company stocks as the preferred choice of investment, I will be looking at a more passive unit trust investment with direct correlation to oil price movement.

By utilizing the fund's strategy of investing into over-the-counter (OTC) energy derivatives instrument, an investor investing into this fund can:-

  • Enjoy direct correlation to oil price gains (or losses) 
  • Eiminate other form of risks caused by investing into individual company stocks

Which unit trust fund is this?
Fund Background
Fund name : RHB Energy Fund
Launch Date : 23 March 2009
Available on eUnittrust : Yes
Fund benchmark : 60% S&P GSCI Energy Official Close Excess Return Index (RM) + 40% MSCI World Energy Index (RM)
Investment Strategy :
  • 90% to 100% of NAV: Investments in Malaysian bonds, money market instruments, cash and deposits with financial institutions.
  • Up to 10% of NAV: As capital payment for exposure to a derivative instrument in the form of a swap agreement that will provide the Fund with exposure to the global energy sector. With this capital payment, the Fund can have a notional amount of up to 100% of its NAV exposed to the Underlying which are linked to the global energy sector
Fund Performance Analysis
From the fund's factsheet dated 31 March 2016:

RHB Energy Fund Performance

Fund Performance vs Oil Price Movement
The comparison is made in terms of Year to Date (YTD) performance of RHB Energy Fund with that of Crude Oil Price movement from 31st December 2015 to 31st May 2016. The result are shown below:

  • YTD for RHB Energy Fund : +18.87%
  • YTD for Crude Oil Price : +32.53%

RHB Energy Fund vs Crude Oil Price (31 Dec 15 to 31 May 16)

It is clear that in terms of YTD performance, the fund was not able to return equal of the % gain made by Crude oil price. However before we make a judgement call, let's take a look a the volatility of this fund versus that of crude oil price.

Crude Oil Price volatility
RHB Energy Fund volatility
In order to make a simple comparison of volatility, I have taken major "rises and dips" of Crude Oil price between 31st December 2015 to 31st May 2016. Next I calculated the percentage gains and losses between each rise and dip for Crude Oil price and compare that with that of the RHB Energy fund. Details of the volatility comparison are then summarized in the table below:

RHB Energy Fund
(%) Gain / Loss
Crude Oil Price
(%) Gain / Loss
31 Dec 15 - 20 Jan 16
20 Jan 16 - 29 Jan 16
29 Jan 16 - 11 Feb 16
11 Feb 16 - 22 Mar 16
22 Mar 16 - 4 Apr 16
4 Apr 16 - 31 May 16
One positive outcome that can be derived about RHB Energy Fund is its low volatility. Major dips in crude oil prices as shown in the table does not generate equal percentage losses for RHB Energy Fund. For example between 31 Dec 15 to 20 Jan 16, crude oil price loss 28.35% in value while RHB Energy Fund only lost 1.75%. Similar outcomes are also seen for crude oil price dips during early February and late March.

In a nutshell, RHB Energy Fund is able to provide some form of protection (via low volatility) for investors whom intend to make a one time lump investment. However, the trade off for having low volatility is that the (%) gains made by this fund would not be able to match that of crude oil prices.

All in all, RHB Energy Fund is certainly worth the consideration for investors whom believe in the potential rise of crude oil price over the next few years. Availability of this fund at low sales charge via eUnittrust makes it cheaper and more convenient for Malaysian investors to invest.

If the words of the deputy crown prince of Saudi Arabia, Prince Mohamad were to be taken as a form of a hint...

We might actually see oil prices going back up to USD70 per barrel! That my dear readers is an opportunity worth considering.

Cheers and happy investing! 

P.S : 
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