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December Hangover

21.12.2015

Oil prices are 17 percent down so far in December, the credit markets are under severe pressure and interest rates have risen in the US for the first time in 10 years. 

The cause of the falling oil price is the fruitless OPEC meeting. The cartel now has no official quotas. Therefore, everyone is free to pump as much as they want.

Saudi Arabia and Iraq have already been pumping a lot. This year they have increased production by 0.9 and 0.6 million barrels per day respectively. This increase is as large as the entire global supply surplus at the moment.

The prevailing oil price of $37 stings hard for Norway. Where will it continue?

Full inventories?

Pessimists point out that inventories can go full during the winter or spring. In this case, supply would have to be brought in line with demand overnight which might require a fall in the oil price to "cash cost" for shale oil producers at around $ 20 per barrel.

Optimists point out that Canadian oil sands have a much higher “cash cost”. It is estimated that production of nearly two million barrels per day in Canada currently does not even cover variable costs.

However, it is unlikely that the oil market will get a boost from Canada. The reason is that shut-down and startup costs for oil sands plants are substantial and the owners are usually financially strong.

While the risk of reaching the inventory ceiling creates an uncertain short term picture, the outlook is still positive longer term. One of the reasons is that US shale oil production is falling by 100.000 barrels per day each month.

Furthermore, demand prospects are also good. We can mention that the Chinese motor vehicle sales reached an annual rate of mind-boggling 27 million units in November. The number is up 24 percent from the same time last year.

Turbulent credit markets

The oil price fall has not only made us Norwegians poorer. It has also brought a storm to the credit market.

Fear of defaults in the commodities sector has sent risk premiums for corporate bonds skyrocketing. The fall in bond prices has been reinforced by the lowest liquidity since the financial crisis coupled with accelerating redemptions in bond funds.

In the United States two funds recently had to shut down because it was barely possible to sell the remaining bond portfolio.

The low liquidity combined with high redemption rates caused the turmoil that started in the commodities sector to spread to the entire corporate bond market.

Paris rally

Shares in renewable energy companies have rallied strongly after the climate summit in Paris. The exception is the twin companies Bonheur and Ganger Rolf, which in reality are wind power companies with minor other investments.

At the current level, one pays less than half the price for the wind farms and gets all other assets, such as the shares in Fred. Olsen Energy and the cruise business for free.

We see a tempting pickup potential and include Ganger Rolf into the portfolio.

Dovre-portfolio:

  • Panoro Energy
  • Det norske oljeselskap
  • REC
  • Aker Solutions
  • PGS
  • Ganger Rolf

In: Ganger Rolf

Out: Thin Film