Month: July 2020

Dear Ladies and Gentlemen

Many thanks for your messages on my weekly mail on crude oil. I received many positive feedbacks. Thank you very much.

However, my old friend Mark noticed a mistake. I wrote: “Venezuela’s daily production stands at roughly 600 million barrels per day, while in 2017 they were producing 1.9 million on average per day”. This, of course, should have read: “Venezuela’s daily production stands at roughly 600 thousand barrels per day, while in 2017 they were producing 1.9 million on average per day”.

Please accept my apologies.

Ladies and Gentlemen, I will mostly be on vacation for the next two weeks. I will not go away but stay at home, and I will answer my emails but I will not write my weekly emails. The next regular weekly mail will, therefore, be published on August 7, 2020.

Thank you for your understanding!

Ladies and Gentlemen, I wish you a good start into the day, a wonderful weekend, a great summer, and above all, good health!

Yours truly,

Stefan M. Kremeth
Wealth Management
Incrementum AG

Tel.: +423 237 26 60
Cell: +41 79 303 48 39
Im alten Riet 102
9494 Schaan/Liechtenstein
Mail: smk@incrementum.li

Dear Ladies and Gentlemen

Energy prices are an essential pillar in any economy. I am generally interested in energy prices as such; today, however, I would like to focus on crude oil and on what can be expected on the crude oil price front over the next 12 – 24 months. Crude oil’s price development, directly and indirectly, touches on almost any area of daily life. As mentioned in my last weekly mail, my friend Robert made me aware of what looks like a market misconception to me. You may ask what this misconception is all about and I am happy to elaborate on it briefly.

The crude oil market is currently looking at a significant imbalance between supply and demand. The current surplus in storage, i.e. excess inventories, amounts to roughly 180 million barrels.

A balanced market is vital to OPEC members and other oil-producing countries. However, what exactly is a balanced market, i.e. a market equilibrium?

Economically speaking market equilibrium is reached when there is a perfect balance between supply and demand, which means eliminating any sort of surplus or any sort of shortage in a given product. When it comes to crude oil in the current business environment, OPEC and its friends are therefore looking at eliminating existing surpluses. The question is whether this is feasible. For that, I would like to quickly look back at recent history and at what had happened during the last crude oil crises in 2017.

In 2017 OPEC plus some other oil-producing countries (OPEC+) were able to reduce excess inventories of 152 million barrels in about ten months. This was very fast, indeed. But then in 2017, there were no lockdowns reducing economic activity, as we had painfully experienced in H1 2020.

How was it possible to reduce inventory so fast in 2017? The OPEC+ countries were cutting overall production, as they are doing today and they were cutting exports to the U.S., who at the time was increasing its oil production by roughly 1.2 million barrels per day from 8.7 million barrels at the beginning of 2017 to 9.9 million barrels at the end of 2017. Due to daily U.S. oil consumption of 18.9 million barrels per day and despite the production increase, the U.S. consumers (private and industry) were still “helping” to reduce excess inventory by a hefty 120 million barrels in more or less ten months.

Now today, U.S. oil production is going down by at least 1.8 million barrels per day. At the beginning of the year, production stood at 12.9 million barrels per day, reached its high in March 2020 of 13.1 and stands now at 11 million barrels per day. Consumption, however, is expected to come in only slightly below last year’s 19.4 million barrels per day for the full year.

Furthermore, Lybia produces currently roughly 40’000 barrels per day, while they were producing almost 1 million barrels per day in 2017, Venezuela’s daily production stands at roughly 600 million barrels, while in 2017 they were producing 1.9 million in average per day and Iran’s exports are half of what they were in 2017. The Iraqi production again is way less than in 2017. I assume these supply-side issues will help OPEC+ to reduce the surplus.

Now, China’s consumption is expected to go down for the full year with a slump during the first and beginning of the second quarter and a steep recovery in H2. Global demand for the full year is expected to go down by some 2.5 million barrels per day for the full year, which is less than many analysts expected in April of 2020.

Ladies and Gentlemen, in addition to all of this, the low crude oil prices will lead to a significant reduction in CAPEX-investing and maintenance by oil producers, and this again will most probably lead to lower output and maybe even closures of oil wells.

What is my conclusion? I believe we will see higher crude oil prices in 12  – 24 months from now, as inventory levels will decrease drastically in H2 2020.

Ladies and Gentlemen, I am looking forward to your comments! But please do not forget (instead of hitting the reply button) to send your messages to smk@incrementum.li

Furthermore, Ladies and Gentlemen, I wish you a good start into the day, a wonderful weekend and above all, good health!

Yours truly,

Stefan M. Kremeth
Wealth Management
Incrementum AG

Tel.: +423 237 26 60
Cell: +41 79 303 48 39
Im alten Riet 102
9494 Schaan/Liechtenstein
Mail: smk@incrementum.li

Dear Ladies and Gentlemen

Inertia is a tendency of doing nothing or remain unchanged. It can be synonymously used with words like inactivity, passivity or inaction. In most cases, inertia is terrible. We can find inertia everywhere also in the financial industry.

Inertia in the financial industry may lead to severely insufficient returns. I am very much convinced that increasing regulation favours inertia. Why may you ask? The reason is that regulation limits many participants in the financial industry and especially investment managers and analysts to speak out what they think is best. When investment managers, analysts or investment management firms risk their job or their license, they will tend not to do what they think is best for investors/clients but rather what is best to avoid complication with investors/clients or in other words they will do close to nothing and become inert. Today in any financial company, any new product and any new investment advice need to be checked by compliance and risk management before bringing it to the market. Not as you may think to prevent investors from losing money but to ensure that if an investor loses money, the investment manager, analyst or financial firm cannot be held reliable. In order not to risk any breach of the regulatory framework, potentially leading to sanctions, fines, etc. by the regulator, investment managers play it safe and do not act even if they would love to act.

Excessive regulation may lead to excessive risk aversion. However, in times of an adverse risk-free rate of return, negative interest rates on government bonds, positive return can only be achieved by embracing risk. My partner and old friend Dr Christian Schärer always says, there is no “good” or “bad” risk there is only well- or mispriced risk.

The concept of receiving return without taking a risk is unfortunately not available, especially not in a negative interest environment. It never really was available, even if the term “risk free return” in investment management theory is widely spread. The term is just a term and an essential pillar in theory itself, which the name suggests, is a theory. You know, Ladies and Gentlemen, in most periods over the past decades inflation was higher than the so-called risk-free (interest) return, which means in real terms investors would receive interest on their investment, true (and mostly be happy about it). However, they would give away more than that interest to inflation, without even noticing it and like this lose money (without noticing it) in real terms to the system, i.e. governments who were financing their debt, which in real terms became less and less. This happened mainly unnoticed by the general public.

Ladies and Gentlemen, I hope Brexit will lead to some deregulation of the U.K. financial industry, which then may affect other jurisdictions. This is a long shot, I am aware of that, but I am hopeful! Next week we will have a closer look at crude oil. I sense some misconception and am happy to share interesting information that was brought forward by my friend Robert.

Ladies and Gentlemen, I am looking forward to your comments! But please do not forget (instead of hitting the reply button) to send your messages to smk@incrementum.li

Furthermore, Ladies and Gentlemen, I wish you a good start into the day, a wonderful weekend and above all, good health!

Yours truly,

Stefan M. Kremeth
Wealth Management
Incrementum AG

Tel.: +423 237 26 60
Cell: +41 79 303 48 39
Im alten Riet 102
9494 Schaan/Liechtenstein
Mail: smk@incrementum.li
Web: www.incrementum.li