Aboard the roller coaster of the price of oil

This is not a news that commodity prices are volatile and unpredictable. Countries that depend on natural resource extraction have their faith related to the price of a particular product or group of products. The end result of a shock on the price of a commodity is usually the adversity of the producing country and its citizens. The opposite is true when commodity prices are trading at high levels for a long time. The price of oil is a typical example of the first decade of the 21st century, when resource-rich countries benefited from high commodity prices. During this period, Brent crude reached a record high of $ 144 in 2008.

In the last 10 years, the price of oil has not been as good. Brent crude oil has been in free fall since the last financial crisis, during which the price of oil fell, while oil traders expected a drop in demand due to fears of recession. Since then, it has resumed ground and in June 2014, Brent crude traded at 115 dollars a barrel, but has again reached its lowest level for several years early 2016, to a level close to 30 dollars . This strong sell was triggered by worries about global growth and at a time when global demand was becoming negative.

However, over the past 18 months, the price of oil has evolved positively.

As usual, political problems have contributed to rising prices, as trade tensions and political and economic sanctions imposed on Iran by the United States have weighed on the markets since the beginning of the 1990s. l & # 39; year. In the first nine months of the year alone, the price of crude oil rose 28%.

Sanctions against Iran have a direct impact on the crude oil market because the United States prohibits countries from buying Iranian crude oil. The consequence is a drop in demand for Iranian oil and therefore a decrease in the daily supply of oil. Because of these sanctions, various countries have already reduced or completely stopped the purchase of Iranian oil. In fact, part of the rise in oil prices could be attributed to the concern that producers will not be able to fill the gap in production caused by the fall in Iranian oil exports after the ## 147 ## 39, entry into force of the sanctions.

However, over the past six weeks, we have seen a partial reversal of soaring prices until early October. This notwithstanding the fact that the sanctions on Iran came into force earlier this week.

Different market players believe that the decline in the Iranian supply will be largely offset by that of other oil producers. In addition, forecasts of slower economic growth, all things being equal, also imply a decline in oil demand. In addition, Washington has also agreed to soften its sanctions somewhat and has allowed eight countries to continue buying Iranian oil. China, the biggest buyer, is one of eight countries.

The drop in oil prices is a boon for consumers and a curse for producers. The latter includes major oil exporters such as Nigeria, Venezuela and Russia.

The negative political and economic consequences of the very low oil prices on Venezuela in recent years are widely known.

Due to the country's dependence on the oil industry, the state has massively reduced public spending, which has resulted in shortages and an impressive rise in the prices of goods and services.

The country was on the verge of civil war. Countries that rely heavily on the price of a volatile commodity, such as the price of oil, should find ways to diversify their sources of income in order to mitigate as much as possible the negative consequences of declining commodity prices. commodity prices.

Washington has agreed to easing its sanctions somewhat and has allowed eight countries to continue buying Iranian oil. China is among the eight countries

Investors should always keep in mind that investing in commodities is a risky strategy that usually does not generate income. An investor who wants a portfolio exposure to a particular commodity can invest in shares of companies operating in that particular sector.

However, holding direct shares of a publicly traded company will add more levels of risk, such as the risks of default and concertation. Risks can be mitigated, but not totally reduced, if exposure to commodities is accessed via an investment fund or an exchange traded product. Such investments will reduce the risk of default and concentration, while exposing the portfolio to a commodity or a number of commodities.

Investors who opt for a commodity fund with exposure to the oil sector will hold shares in companies involved in oil exploration, refining, storage and distribution of equipment.

Although the fund fluctuates more or less depending on the value of the commodity, the risk of default and concentration is lower and the level, gains or losses do not necessarily reflect fluctuations in the price of oil.

If you are still uncomfortable with a commodity fund in your portfolio, due to the expected volatility, you should at least consider a multi-asset fund which among the different asset classes, holds shares of companies whose profits are related to raw materials and energy. Such assets tend to provide an element of protection against higher inflation. In fact, with stronger inflation fears being more obvious than ever, investing in commodities can also mean potential hedging against inflation.

Higher inflation is generally not positive for bonds and equities, but can often mean higher commodity prices. Historically, commodity prices have not shown such a high correlation with bonds and high-quality stocks and can therefore offer real diversification when you really need it. However, keep up, the roller coaster may not be over because the political risks and growth concerns continue to leave a mark on the price of oil.

This article was prepared by Gabriel Mansueto, Branch Manager and Senior Investment Advisor at Jesmond Mizzi Financial Advisors Limited. This article is not intended to provide investment advice and the content should not be construed as such. The Company is authorized to provide investment services by MFSA and is a member of the Malta Stock Exchange and the Atlas Group. Directors or related parties, including the Company, and their clients are likely to have an interest in the securities mentioned in this article. Investors should remember that past performance is not a guide to future performance and that the value of investments may increase or decrease. For more information, contact Jesmond Mizzi Financial Advisors Limited, 67, Level 3, South Street, Valletta, at 2122-4410, or by email at [email protected].

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