How the war is affecting Oil and how it impacts assets

Founding partner of Hub do Investidor, Ricardo Penha, comments on market cycles and prospects for the oil market

Curitiba, July 2022 – How did Europe become hostage to Putin? Could this energy crisis translate into an economic downturn? How are the actions in this scenario? Will the East be able to bring down oil prices? Ricardo Penha, founding partner of Hub do Investidor comments on these points and how the investor becomes hostage to emotions and ends up leaving aside the strategy and long-term investment plan.

Penha begins by explaining how market cycles influence asset prices. According to him, the market works like a pendulum, moving like waves, and in the last 10 years we have seen that developed countries have had strong growth; Risk assets had a good performance, largely due to low inflation and also because interest rates were stimulating. “Even in Europe, the European Central Bank still has these stimulating interest rates even with super high inflation.

It is important to understand this moment of conjuncture because people, normally, are anchored: the last 5 years, 10 years were like this, but, not necessarily, the next ones will be like this. We are seeing a very challenging scenario over there, a scenario of high yields on European debt securities, also combined with a drop in the price of risky assets. Europe has the most delicate situation in the developed world.

The question of Russia has a lot of impact, because the war with Ucrania added a hint of concern that cannot be dismissed, a profound energy crisis. And then, with all this conjuncture, combined with inflation, will the European Central Bank still raise interest rates?”, he asks.

Impacts of the War on Europe

“I like the phrase: 'there is no tragedy foretold'. Now we have all the media and influencers talking about recession and crisis, as you know agents have the characteristic of anticipating events and this time it was no different, stock markets fell by approximately 20% and only now are we talking about the problems. Nobody thinks what Putin did was correct, but we cannot fail to recognize him as a great strategist, he has a 'knife and cheese in his hands' and managed to bring the West to its knees.

Europe, mistakenly, – and here we do not need to discuss what led Europe to depend so much on Russian energy – has become highly dependent on Putin, if tomorrow he decides to cut off the gas supply for good, we would have a serious energy crisis, which would be accompanied by a recession”, he assesses.

 To understand and make the subject more tangible, Penha recalls that Brazil, in the 2000s, faced a similar problem with the energy crisis and rationing, the impact this had on GDP was very clear. “Talking about rationing is no use: energy is economy and it will go into recession”, he says. According to Penha, this is the worst case scenario, because there is a very intense increase in energy, the increase in the price of food and services, unions in Europe are demanding wage increases, which we had not seen in the last 20 years. “While the working class was fighting for a 2%, 3% salary increase, they are now asking for 7% and 8%, showing that the dynamics of the labor market could be different.

What few people say is that in the West, in a Democracy, people have voices, if people are not satisfied they go to the internet and to the streets to protest. When you live in a dictatorship, in an autocratic system, it's no use, you won't go out on the streets of Russia to protest against Putin”, he comments. “So, the “pain” that an American or European can feel for the war is much less than that of a Russian or Chinese. No one in the West is willing to pay 10x more on their electricity bill or 2x more to fill up their car. This situation causes a social upheaval”, he analyzes.

About oil: time to buy or not?

According to the specialist, it is difficult to “nail” price accuracy. The way an iPhone is priced is different from the way commodities are priced. In commodities, the basic law of supply and demand applies. “We see, in this case, a very solid demand and a maintenance of supply. When you look at this equation, it seems obvious to see where the commodity price asymmetry is. One of two things: either we will have a very large destruction of demand caused by high prices and recession or we will have to have a significant increase in the supply variable, which seems to have a more remote chance of happening.

Among the largest producers, Saudi Arabia is already at its production limit, unable to grow much more. Russia, which is a major player in the global oil market, the West is sanctioning, so we can't count; that leaves the United States, but over there, a large part of the production is private, and a few years ago we saw part of this industry go through great financial difficulties and now there is enormous pressure from the shareholders for them to focus on generating shareholder value rather than production growth.

So, on the supply side, it is difficult for us to see where this extra supply of oil will come from, that is, the solution for cheaper oil must come from a global economic slowdown”, he explains.

 According to Penha, the optimistic view of the house with the commodity is based on the mismatch between supply and demand, oil stocks in the world at minimum levels and the difficulty of seeing a substantial increase in supply in the coming years.

To give you an idea, the Americans closed 5 refineries in the last 3 years, removing approximately 5 million barrels per day of fuel supply from the market, the last refinery built there was in 1974. “Nobody seems to want to invest in a sector that is crucified by governments, media and part of the population, the uncertainties about the future are enormous”, he comments.

Via Investor Hub https://hubdoinvestidor.com.br/