Tuesday, 25 November 2014

Market Watch - Cheap Oil May Be A Sign Of Bigger Problems

How low can the oil price go? One of my favorite strategists, Russell Napier of (former) CLSA fame, who has now gone independent, used to say that it was hard enough to get the direction right, and nearly impossible to get the target price right. All forecasts are inherently flawed in nature as they try to project into the future, and none of us are clairvoyant.

we know that the cash cost of shale oil is about $60 per barrel...

So, yes, I think the oil price can decline below $60.

Yes, China has had three real-estate downturns in the past seven years, but the latest one is coming at a time of debt-driven boom, which means the consequences this time can be quite different.

...so the decline in the Chinese real-estate market has the potential to create a domino effect there in 2015.

If China does decelerate well below 7% in 2015, an oil price target in the $30 to $40 range is completely realistic. Such predictions may sound dramatic in theory, but in the end, what we are after here in these pages are the investment implications of macro trends. Looking at the world from a top-down perspective is not meaningful if it does not produce actionable ideas. Clearly, I see downside potential for oil, which suggests one should consider gravitating toward investments that make their money on volume and not on price in the oil market.

(Ivan Martchev is an investment specialist with institutional money manager Navellier and Associates.) 

Source: Market Watch.