Waiting For Brent To Tank

Latest news: Oil is trading in bear market territory, with prices falling to their lowest level this year as rising supplies threaten to derail an effort by some of the world’s biggest producers to bring an end to a three-year glut. Renewed concerns about growing production from within the Opec cartel and a reinvigorated US shale industry took global crude benchmarks on Tuesday to the lowest level since mid-November with Brent crude sinking to $46 a barrel. Prices at one point during the session were down more than 20 per cent from levels at the start of 2017. A decline of more than 20 per cent from the most recent high is typically considered a bear market. Crude has now erased all its gains since late last year, when Opec and other producer countries, including Russia, agreed to cut output by 1.8m barrels a day for the first six months of 2017. A decision in May to extend the original six-month deal for a further nine months has not helped lift sentiment as a growing chorus of traders and analysts question the effectiveness of the supply curbs.

Price of Brent crude on Tuesday

Brent crude, the international benchmark, fell 89 cents, or almost 2 per cent, to settle at $46.02 a barrel, the weakest level since November 15. West Texas Intermediate, the US marker, dropped by 97 cents to a nine-month low of $43.23 a barrel, down by more than 20 per cent from a February peak.

Brent Graph.png

Two questions – (1) where is the bottom for brent? (2) what would you do when Brent tanks to the bottom?

Where is the bottom?

Dunno. If I know, I will be super damn rich. However, if you look at the forecast done by Trading Economics, we may see as low as USD45 by end of this year, USD37.5 in long term:

BrentForecast.png

What would you do when Brent tanks to the bottom?

Wait for recovery and tap into stocks that are proxy to Brent / oil. As mentioned in previous postings, one possible equity instrument (listed on Bursa Malaysia) that serves as a potential good proxy to crude oil is Sapura Energy. It has high correlation with movements in Brent:

SAPE vs Brent Graph.png

Updating the regression analysis (significant R-squared):

Regression Results.png

Forecast vs Actual:

SAPE Forecast Graph.png

Currently, Sapura Energy is trading slightly below that of the forecasted value based on the regression relationship. Nevertheless, forecast is always prone to errors / random noise. Using a 68% and 95% confidence interval and a scenario analysis of different Brent price, the forecasted range of Sapura Energy is as follows:

SAPE Forecast.png

If Brent has ever bottomed out, one potential opportunity may be to trade at the lower range of the forecasted value in order to tap into potential recovery of Brent / oil.

DISCLAIMER: THIS IS A PERSONAL BLOG AND SHALL NOT BE RELIED IN WHATSOEVER MANNER BY ANYONE. ALL ARTICLES CONTAINED IN THIS SITE ARE STRICTLY FOR INFORMATION AND ILLUSTRATIVE PURPOSES ONLY AND DOES NOT PURPORT TO SHOW ACTUAL RESULTS. IT IS NOT, AND SHOULD NOT BE REGARDED AS INVESTMENT ADVICE OR AS A RECOMMENDATION REGARDING ANY PARTICULAR SECURITY OR COURSE OF ACTION. SOURCES USED IN THIS SITE HAVE NOT BEEN INDEPENDENTLY VERIFIED FOR ACCURACY, COMPLETENESS AND TIMELINESS. YOU SHOULD SEEK INDEPENDENT AND PROFESSIONAL INVESTMENT ADVICE IN REGARD TO YOUR INVESTMENT DECISIONS. THE AUTHOR MAY HOLD POSITIONS IN THE SECURITIES MENTIONED IN THE ARTICLES

Author: Ken Utau

Markets Observer + Food Lover

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