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Super Mario Intervenes

25.01.2016

It has been an exceptionally difficult start of the year, but the probability of help from the ECB in the form of interest rate cuts and increased quantitative easing is now increasing.

Financial markets have started 2016 in rebellion mode. Most stock exchanges are down 20-30 percent since the highs of last year, while the bottom has completely fallen out of the oil price.

Historically, rebellions tend to end when the riot police arrive. In financial markets this responsibility is held by central banks, with fiscal policy being the second line of defense.

It appears that the ECB now thinks that enough is enough and have started to mobilize their troops. Because of the drop in oil prices, inflation will fall into negative territory again, and Super Mario does not like this, along with the slowing of growth that the market turmoil will cause.

At a press conference last Thursday, he went so far to suggest that new stimulus will be launched at the next council meeting. We are probably talking about a combination of interest rate cuts and additional quantitative easing.

Asked whether his statements are trustworthy, he replied that he speaks on behalf of a unanimous council. These signals may mean that the stock market is at a bottom or close to it, but who can rescue the oil price?

OPEC (1960-2014) RIP

The riot police in the oil market has traditionally been OPEC. While there is little doubt that the price crash has awakened all major oil exporters, we doubt that there will be some speedy agreement on production cuts. The reason is that the bitter Sunni-Shiite conflict probably has made the cartel ineffective.

Without intervention from OPEC sharp volatility will continue. The good news is that oil prices will bottom out during the current quarter anyway, and then will start a recovery.

The reason is that the current prices are far below sustainable levels, which will lead to an accelerated rebalancing. The fall in US shale oil production will accelerate, and the Canadian tar sands operations are also under severe pressure.

Canada produces 2.3 million barrels of crude oil per day from tar sands. With total production costs around 80-90 dollars per barrel and variable costs of 30-40 this is acutely unprofitable at current levels.

Oil from tar sands is heavy and sour, and is traded under the name of Western Canadian Select (WCS). WCS price is currently around 15 dollars per barrel.

It is easy to imagine that the extremely low WCS price will cause the owners to initially accelerate maintenance-related shutdowns. These can easily turn into permanent shutdowns.

This year's big surprise in the oil market may be that Canadian oil production falls more than expected.

Bounceback Candidate

This week we put DNO into the Dovre portfolio. The stock is extremely oversold and is a rebound candidate in the short term.

In the long term, the company is a bet on a successful, strong and independent Kurdistan. In that respect, it is encouraging that the Kurds are experiencing ever-stronger political and military support from the United States.

Dovre portfolio:

  • Panoro Energy
  • Frontline
  • Kongsberg Automotive
  • Opera
  • Storebrand
  • DNO

In: DNO

Out: Norwegian