Low oil price, which Oil and Gas counters to invest?

Prior to WTI or Brent oil price plunged below US$20, I asked my broker how can I invest directly in oil. My broker introduced United States Oil Fund (USO) listed in NYSE. You need to declare W8-BEN to invest in US stocks. Please check more with your broker. My friend also asked me, so I did my research, and realized that USO is only good for short term investment or trading. Therefore, I refrain from investing USO for now. In the last section of this post, I will also explain more about USO. For now, I will introduce some alternative Oil and Gas counters

EXXON MOBIL (XOM)

In fact, prior to that, I already purchased Exxon Mobil (XOM) which is my stock on watchlist. Refer to March post here which I indicated XOM in part of my watchlist:

Unfortunately, I did not invest during the low of $30s per share. Two reasons: First, I am bad in timing, and second, I felt it is too risky back then when the crisis just started. Instead, I nibbled at low $40s per share which I reckon it is still relatively cheap considering its peak is >$90 and average pricing of XOM is above $70 for the past 5 years. Current price is $47.5. If price drop below $40, I will accumulate more.

XOM is one of the largest Oil companies in the world with a Revenue of >US$250 Billions. Its cash position is also one of the strongest. Earnings in 2017-2018 is US$20B on average and 2019 earning fall to US$14B. Dividends per share are typically around 4-5% in the past, with last year’s dividend at $3.48 per share which translate to 7.3% based on current price.

With less than $20 oil compared to $60 per barrel in previous years, earnings will decline significantly ahead. That said, it’s not going to be 1/3 the earnings just as the price of oil. This is due to the fact that XOM is diversified into refineries and chemical products aside from upstream oil and gas exploration business. While XOM rising debt to $47B in 2019 is a concern, it is not uncommon in the industry and XOM leverage levels are much lower than most of its peers. XOM also generates cash flows of $30B from operation in 2019, and FCF of $6.6B after spending. It has $3B in cash but since its debt to capital ratio is below 20%, it has ample room to borrow more.

Nonetheless, it is expected that dividend payouts going forward will decline with decreasing earnings if oil continue to be depressed.  But, if you believe Oil will recover back to the $60 over the longer term, XOM is definitely worth a look.

ALTERNATIVES TO XOM IN NYSE

Other Oil and Gas majors worth considering if not XOM, includes: Chevron Corp (CVX), Royal Shell Dutch (RDS.B shares normally without withholding tax) and ConocoPhillips (COP).

Otherwise if you think a single stock is not diversifying sufficiently, you can also look into Energy ETF (XLE) or Oil and Gas Exploration ETF (XOP) which comprises of baskets of Oil and Gas companies.

SINOPEC (HKG: 0386)

Another stock I invested recently is China Petroleum & Chemical Corp (or Sinopec) listed in Hong Kong Stock Exchange. Sinopec is owned by Sinopec Corp (or CPC – China Petrochemical Corp), the largest Oil refinery company in the world, stated owned in China.

Sinopec is more in the downstream business focusing on refining, chemicals, lubricants etc, with a lesser extent of its earnings from upstream exploration. 2019 income is US$420B with earnings before tax of US$12B. Net cash flow from Operation is US$22B in 2019, US$25B in 2018.  Annual dividend to be payout in Jun 2020 is HK$ 0.3387 which translate to 8.6% dividend at current price of HK$3.93. Alternative to Sinopec are PetroChina or CNOOC which are also state-owned giants listed in HKSE.

If you believed in China economy on top of the possible oil recovery in the long-run, then these three companies are worth delving into.

WHY NOT SGX OIL AND GAS STOCKS

Personally, I will also stay away from Oil and Gas stocks listed in SGX. This is because most Oil and Gas companies listed in SGX are second or lower tier companies below the Oil and Gas value chain. Oil majors and state-owned oil producers like those aforesaid are at the top of the value chain. In an oil crunch, they will normally pass on the “pain” of low oil margins to their contractors and subcontractors, negotiating for rock-bottom contract pricings.

Two major O&G caps in SGX are Keppel and Sembcorp marine. Since the Oil Crisis in 2015, Keppel Corp has only a small portion of its earnings in Oil and Gas with low demand for Oil Rigs and specialized Offshore Oil and Gas related vessels or equipment.  Likewise, Sembcorp Industries’ subsidiary Sembcorp Marine is also struggling in the past 4-5 years. Even if they manage to win orders, margins are often squeezed by their clients who are either oil majors or rig or vessel owners.  Furthermore, clients of Keppel and Sembcorp Marine will be very cautious in any new investments in this environment. The rest of companies within the industry are mostly in the Offshore support or oil and gas equipment related companies that belong lower in the value chain, who will suffer even more in terms of revenue and profit margins.

WHY NOT USO

USO is an exchange-traded product fund listed in NYSE. You can google more about USO, and lately I also saw several bloggers already explained what is USO is NOT advisable to buy now if you are considering long term investment. I will explain briefly here as well.  

USO seeks to replicate performance of WTI light, sweet crude oil, less fund expenses. The fund invests in future contracts, as opposed to physical product of oil. The futures curve of the WTI will drag or drift the price of USO!

• Negative Drag (Contango) –  Price Front Month (May) < Back Month (Jun, July, Aug etc) 
• Positive Drift (Backwardation) - Price Front Month (May) > Back Month (Jun, July, Aug etc)   

What happens last week was a huge contango which drag USO down. The near future of oil is still very bearish and hence contango is still expected. The USO fund has to roll many contracts to the forward month incurring losses, which makes buying of USO for long term investment unfavorable.

Refer also to my previous article : Negative Oil Price – what it means? And how come Exxon or Shell share price did not fall as much? How about Keppel and Sembcorp?

CONCLUSION

Oil price is at historical low. If you think the world will still eventually demand for more oil, and price of oil will recover in the long run, then you can possibly invest in oil stocks. But be very cautious because and consider the risk and reward factors carefully.

Refer to my earlier article:  Wall Street Vs Main Street (Part 1) - Irrational Exuberance

It is unclear when the Corona crisis will be over. And as long as the virus is still considered pandemic, global demand will be drastically affected resulting in a permanent decline in the demand of oil.

I had considered the risk and reward myself based on my financial portfolio, and reckon that nibbling at XOM and Sinopec makes sense.

How about you?

Wall Street Vs Main Street (Part 1) - Irrational Exuberance

More than 26 million Americans have filed for unemployment aid since mid-March due to the pandemic. Data showed that US is nowhere near lifting of restrictions and the economic situation in the main street is daunting.  Oil price reached its historical low entering into negative territory when storage scarcity poses huge problem due to low demand. There is no clear sight of economic recovery in the foreseeable future. On the contrary Wall street stocks registered one of their best runs last month. Earlier this month, the market posted their best weekly performance since 1974.

Why is there such a big contrast between wall street and main street?

UPSIDE REWARD AND DOWNSIDE RISK NOT CONSIDER PROPERLY

There are many possible reasons. The most typical and the mechanical ones are emotionally-led news and optimisms which spur the stocks recovery.

Consider possible upside and downside

For instance, some of the positive news includes: stimulus from the Fed, peak of infections reached, impending discovery of a vaccine, restrictions lifted and economy reopening, or the thinking that this pandemic is just like any other plague which will be over in no time and all things back to normal. These are valid reasons for the upside.

However, at the same time, investors ought to consider the downside “what if” events.

Data showed the worst is far from over. Furthermore, there can be possibility of second wave attack and vaccine may take longer than expected to be developed. And we definitely cannot “inject disinfectant or shine ultra-violet into our body” to kill the virus. Nor can the government just allow the private sector decides and take the responsibility to open the economy when the virus is still causing rampage.

Ignorance of retail investors

Retail investors who lack in-depth knowledge and expertise are often driven by emotions resulting in herd behaviour which is always wrong. Refer to my previous post here explaining about the typical mainstream mindset. We think they can beat the market outright and definitely do not want to miss the once in a lifetime experience to buy stock.

Low bond yield

Fund managers are mostly responsible for market movements. With very low bond yield, managers is likely to influence their clients to buy into the “so-called” investment grade stocks that will give them 5-6% yield without fully explaining the risks involve. Since managers earn commissions from their investors as long as they invest, hence many do not really care if their clients suffer losses.

Risk exceeds Reward

To me, the downside risk simply far exceeds the upside rewards now, in view of the many uncertainties ahead. Imagine the world is in virtual lockdown. When was the last time this happen? Yet, forward PE estimates of Dow and S&P are over 20 with market rallying. It is evident that many stocks are still very expensive. Even if economy do re-opened, it is not as if there is a “switch” that will immediately bring “light to the room”. The cheer from Wall-street is unfounded.

To be more profound, these reasons are in my opinion are not the fundamental one causing the rally.

IRRATIONAL EXUBERANCE AND FOOLED BY RANDOMNESS

In essence, I believe the underlying reason of the disjointed reality between main street and wall street is the human nature who tends to be overconfident about themselves and the future.

Several years ago, I read a few books such as Robert Schiller “irrational Exuberance” and Nassim Taleb’s “fooled by randomness.” Refer to an article I wrote from Mr. Taleb’s book here.

Both books cited why people tend to be over-confident about their capability to win due to a random event that provides short term gain, without looking at the fundamentals that shaped long term outcomes. As a consequence of this human nature, risk taking appetite rise over time without making conservative preparations for bad outcomes!

Robert J. Schiller quoted:

“People still place too much confidence in the markets and have too strong a belief that paying attention to the gyrations in their investments will someday make them rich, and so they do not make conservative preparations for possible bad outcomes."

“Irrational exuberance is the psychological basis of a speculative bubble. I define a speculative bubble as a situation in which news of price increases spurs investor enthusiasm, which spreads by psychological contagion from person to person, in the process amplifying stories that might justify the price increases and bringing in a larger and larger class of investors, who, despite doubts about the real value of an investment, are drawn to it partly through envy of others’ successes and partly through a gambler's excitement.”

“How errors of human judgment can infect even the smartest people, thanks to overconfidence, lack of attention to details, and excessive trust in the judgments of others, stemming from a failure to understand that others are not making independent judgments but are themselves following still others—the blind leading the blind.”

Nassim Taleb quoted:

“Do not be Fooled by Randomness. There is something called Dumb Luck!” Time eliminates randomness. The longer it is, the better it reflects the reality.

“Reality is far more vicious than Russian roulette. First, it delivers the fatal bullet rather infrequently, like a revolver that would have hundreds, even thousands of chambers instead of six. After a few dozen tries, one forgets about the existence of a bullet, under a numbing false sense of security. Second, unlike a well-defined precise game like Russian roulette, where the risks are visible to anyone capable of multiplying and dividing by six, one does not observe the barrel of reality. One is capable of unwittingly playing Russian roulette - and calling it by some alternative “low risk” game.”

“Those who were unlucky in life in spite of their skills would eventually rise. The lucky fool might have benefited from some luck in life; over the longer run he would slowly converge to the state of a less-lucky idiot. Each one would revert to his long-term properties.”

“When I see an investor monitoring his portfolio with live prices on his cellular telephone or his PalmPilot, I smile and smile.” Too much emotions are detrimental to making logical decision.

GREED, THE WRONG MINDSET

With overconfidence and pride, comes greed. A friend of mine who is a nice guy said “let’s continue to make money as the real economy crash”. He has not considered the downside when he said this. In his mind, he is only thinking about making money, and how he can beat the market, neglecting the fact that there are equal if not more chance of him losing money.

Greed is in everyone, including me. I remember many years ago, when I was seeing unrealised profits of S$30-40k for just a single stock, and thinking that I was “above the universe” and can earn a living in stocks. I was thinking that I have an edge over the rest of pack, because I was in the industry. Of course, this is me dreaming when I rarely experience the ups and downs of the market yet. Even if I have that experience, how much real knowledge/expertise do I have in the financial system. Did I work that hard to research or read enough? Or how much failures/experiences in life do I have?... to be able to have the wisdom and patience to manage my emotions to stomach the losses, or to resist the temptations of greediness in the rally. How about my portfolio track records over time, and not just one or two or few events? As a matter of fact, years later I experience total loss when the stock price just tanked when it went into administration.

The lust of making money while everyone else loses; the self-gains to buy self-pleasure, and above all, the pride of life to be able to beat the market is just human nature. To be honest, when the crash first began in late Feb, I was quite happy and greed congested my mind. Anyway, this is the situation I had been preparing for, since several years back, when I patiently hoard cash and precious metals without being tempted to buy too many stocks, despite seeing everyone’s else equity portfolio rapidly rising. I was thinking, it finally a time when I make my "killing" in the market. 

As the weeks goes by staying at home and seeing more people died, and knowing that the poor and oppressed are suffering economic hardships, I realise that there is nothing to be proud of really. It is a sad situation, and I will be damn childish and selfish if I feel happy for the economical crash. The correct mindset should not be greed, it should be to “prepare for the worst”, while staying positive and cautiously optimistic. And if we are doing reasonably good, we must be prepared to help those in need, if we are called. 

CONCLUSION

Whether it is a V-shaped recovery with 23-24 March 2020 being the bottom, or trough to be retested, or if there will be U-shaped or W-shapes recovery, nobody knows! We can give all the reasons we want to support our foretelling, but it will be pure speculation.

We tend to think we are the guru, smarter and capable than the rest, and will beat the market. We do not want to lose out in any opportunity to make money, when in reality we are actually not managing our risk. It is in our nature to always believe the worst is over, and that tomorrow will be better. Hence stock market is irrational driven by news, emotions and exuberance. Oftentimes, it is de-linked from the actual situation on the street.

To "jump the gun" so fast, ploughing your cash into stocks so early is not clever, even if you eventually win in future. This is just dumb luck and you are fooled by randomness. Perhaps there can be a “black swan” event in which you or your loved ones losing their jobs, or getting real sick during this unprecedented time which requires a lot of money and attention. There will always be situation outside your anticipation. And if we are complacent, the event that took place will tend to be worse than expected.  

To NOT invest in anything during this time, if you have the capacity and knowledge is also not smart. You should be able to pick up good stocks which will bring good long-term returns, but must be patient and spread out the investments over time.

True investment is about managing risks and weighing rewards over a period of time.

As for me, I reckon I am not here to make a killing during the crisis to get rich. It is more like preparing for the worst and protecting the downside. I have a big family to support, with all seven of my household members heavily depending on me financially. While, I am comfortable in my financial position, we do not have backup luxury of parents’ wealth or apartments handing over to us.

Therefore, I have to be prudent. And as truthful as I write now, I do not feel “shiny” with the good situation I am in (refer to my previous post). Instead, I sincerely hope that the pandemic will end soon even if it means me not earning any money or even losing little money. Economic hardships always hit the poor and oppressed more, while the rich escapes unscathed, although not everlasting! Last but not least, my prayers extend to the weak and poor who suffer!

Stay tuned for Part 2…

Rolf's Updates - My Priorities in Life - Health, Finance, Family, Friends & Hobbies – 2020 1Q

Click here for what does H2F3 (Health, Hobbies, Family, Finance and Friends) means. Refer here for my last H2F3 update in 2019Q2.

Time flies, my last H2F3 post is nine months ago. My first 2020 update as follows.

2020 will be known as the year where Corona Virus wreak havoc causing the world to shut down. We are social beings, but now “social distancing” is enforced. We talk about globalisation and a borderless society, but now countries are shutting borders and restricting air travels. Singapore is in partial locked down from 7 Apr to 1 June. Our government call it  “Circuit Breaker (CB)”. Streets are empty, schools are closed and everyone is told to stay at home! What a 2020 it has been so far!  

HEALTH

Thank God. All my family members are healthy in 2020. My health is reasonably good except for sinus which is still manageable.

Fitness

Up until CB, my weekly exercise routine includes at least 3-4 times of table tennis, gym and swimming / jogging. Since CB, all facilities are closed. You can still go jogging, but I prefer not to go often, because of the crowd. Instead, I enjoy working out at home with my kids. My favourite workout youtube channel is “Anabolic aliens”.

Food

It is not easy to resist food because you are staying at home all the time. Netflix with potato chips and all sorts of junk food. Simply irresistible, but I also try hard to ensure smaller amount. So far it is still good. Meanwhile, lots of home cooked food during this period, thanks to my in law staying with us.

Weight

My weight was 81-82 kg at one point until recently. Good news is I lost a bit of weight lately. Not ideal but still decent. BMI ~24.5, standing 1.78 m at 78 kg, but I prefer BMI of 23-24. Still need to work hard to “flatten the curve” shaving off 2 kg at least.

Supplement

Multi-vitamins, fish oil and Glucosamine for joints because my table tennis session is usually quite intense and last year my joints started to hurt. Age is catching up. Gone were the days where I am fast and agile with quick body recovery.

Spiritual

Blame myself for not devoting as much time. While we pray regularly, the intensity of bible fades. Although we have family house church occasionally, it wasn’t as much as before. One positive news is my maid is reading bible daily before she sleep.

FAMILY

First and foremost, we are more than thankful to be with our family. I personally know friends who are locked down in foreign land alone. Our heartfelt and sincere prayers for them to be reunited with their loved ones soon.

Stay home bonding

Since the beginning of 2020, I have been traveling frequently. My last trip home is mid-March, just before Singapore implement travel restrictions/regulations. To be honest, the CB maybe a blessing in disguise for me. Now, I can spend precious time for family bonding.

Without doubt, it is tough working from home when schools are closed. Home-based-learning plus few young kids running, screaming and crying can drive you nuts. Yet, their adorable smiles and laughter quickly eclipsed the frustrations. On a very positive note, our eldest are being very sensible and caring to her younger siblings. Overall family relationships is fantastic under the circumstances.

Table Tennis family time

Table tennis is a family affair for us. Since mid-2018, I had been my family’s personal coach. No charges! Last year, I handled most part of the responsibility to the professional coaches. Below is a video clip showing my daughter's progress in the sports.

Sports has many benefits. I place a lot of emphasis for my kids to remember why sports is so important. They have to keep in mind on the below benefits that I wanted them to memorize.  Sports is good for: 1) Health and Fitness  2) Focus, Discipline and Perseverance  3) Friends and Fun

FINANCIAL

Career

Things are not bright for my company. Group in the Western hemisphere is facing financial crunch even before this crisis. With the current global downturn, most companies will have gone under already. Nevertheless, we are very lucky to be kept afloat. And soon we will have a strong group of investors as our new owners with debts wrote off. Maybe the company’s >300 years history helps? Also, we are market leader in our field.

On the contrary, business in Singapore responsible for APAC is still “ok”. We have no debts with strong cash and orderbook that can possibly last us through for the next 1.5-2 year. My “prudent and prepare the worst mindset” has possibly assimilated well into bringing the company to its current situation. A pat on my own back…*blushed*!

Tend to do well during Crisis

It is not the first time that I tend to do better during crises. This year, my increment is one of the highest since I started in the company. Similarly, during the Financial and Oil Crises in 2008-09 and 2015-16 respectively, I also had my career promotions. This blessing must have come from a higher power.

Investments

Portfolio wise, I saw a rise in my portfolio despite the market onslaught. This is due to profits from the partial sale of gold and crypto, as well as double bagger for Keppel DC REIT.  

My cash position was bolstered further with sale of partial corporate bond at face value. I then use a part of the cash to purchased stocks cheapy. (STI, Exxon Mobil and few REITs.). Sounds clever right!  It’s definitely not a pack of lies. You can refer to my previous H2F3 updates or many other posts to verify my portfolio position and my mindset of non-stock investments in the past years.

Excluding properties and CPF and jewelleries;

·       Prior to the crash, I am 39% Cash, 37% metals, 6 % crypto, 9% shares, 9% bonds.

·       Currently,  I am 51% Cash, 28% metals, 15% shares, 5% bonds, 1% crypto.

Forgive me if you are thinking I am bragging about how good I am or my exceptional foresight.

I just hope to share what I learnt in the last few years and hopefully can bring some beneficial insight to the readers. In 2015 and before, I probably had over 30 stocks with a sizeable equity portfolio. Then there seems to have this invisible energy which is driving me to delve deeply into the truth of our global financial system, which unveils the flaws and wickedness of the system itself. Thereafter, I became sceptical about the market rally after GFC, believing that it was driven by the excess liquidity from QE (money printing), rather than a fundamentally strong economy. My equity portfolio was pared down, and I increase my cash and precious metal’s position.

Home loan

Reduce a hefty lumpsum of my mortgage loan using cash and CPF recently for the refinancing of my mortgage. My loan amount is now below 30% of the market value of my freehold apartment. Loan of 9 years, but my target is to clear mortgage within the next 5 years if possible.

Teaching syllabus for kids

Spend lots of time last year on my PPT Teaching Syllabus for my kids. Did not progress any further since 2019Q2. Simply too busy with too many things. Hectic work with frequent travels, heavy responsibility both at work and at home, kids’ education, enrichment, training etc. Just too many things.

Charitable acts

Committed to World Vision’s child sponsorships last year. Currently supporting several kids in poverty across South-East-Asia. For just $45 a month per kid, you can really improve their lives. For those interested, please visit www.worldvision.org.sg . At the same time, I continue to made regular contributions to support a good friend and his family who had contributed greatly for their neighbours and community. My niece also took monthly overseas education expenses from me.  

FRIENDS

Friends including relatives are very important to me. Before CB this year, I always had almost bi-weekly gatherings  with friends whose kids are also my kids’ good friends. During this locked down, I also stay closely in touch with my friends via whatsapp, lest not forget my friends from foreign countries too. A good friend from China even sent me 10 packs of masks knowing that the Covid situation has worsened. I am so touched by his kindness!

Beside friends, relationships with my superiors, colleagues are also extremely good with almost no conflicts. The earlier part of 2020 also seen lots of relatives gathering on top of CNY.

HOBBIES

My hobbies are also what I do for my health to stay fit, like workout, table tennis and swimming. It also overlapped with family. I love the efficiency of Health, Family and Hobbies. On average 2-3 times a week, I will play table tennis with different groups of friends at different places, which also helped me to widen my contacts. I love reading and writing. Aside from bible, news articles, reading of books kind of stop for me. My last book is read half-way. It is biography of Jack Ma. And yes, I am also blogging.

CONCLUSION

Health – Good but not great due to sinus. Progress in weight loss.  

Family – Great. We are staying at home!

Financial – Great. Job seems pretty secured under the circumstances. Excited that backup exit plan from Corporate career is also looking good.

Friends – Great. Up to CB, still catch up regularly. Good relationships with colleagues.

Hobbies – Great. Regular workout and table tennis with family makes me happy.  

Nobody expected this Crisis! Hence, it is important that we not always take things at face value. What seems very good now may not be always be good in future. Likewise what seems like pretty “shitty” situation now, when one day we look back will always be a good learning experience. Always inculcate the mindset of prepare for the worst. Once you have that mindset, stay positive, joyful and always extend the helping hand to those we are called, to help. 

My prayers to those who are away from families during this unprecedented time.

Negative Oil Price – what it means? And how come Exxon or Shell share price did not fall as much? How about Keppel and Sembcorp?

Oil price in USA, for the first time in history, plunged into negative US$37 yesterday.

FUTURE CONTRACTS

You must be wondering, how can oil price goes to negative?

Since I was previously primarily in the Oil and Gas industry, I remember 2008 when Oil hit $147 per barrel, and now imagine it is worth nothing.

How can it be?

To explain, Oil is a commodity traded on its future price. This means that you can buy Oil contracts now but the delivery is in May, or in June, or in July. Each contract trades last a month.

CONTANGO

Another term which you probably needs to know is Contango which is the current oil situation. Contango means the price of spot price is lesser than the forward futures’ price. This means oil is expected to be more valuable in future, when demand rise again. Currently there is a huge contango, meaning the front month oil price compared to the second month oil price exists a huge spread. 

If buyers are able to find a place to store the oil, there is possibility of huge gains. However, the strategy is dependent on locating a storage facility and managing that expense, as well as actual major changes in global demand.

STORAGE IS FULL

The largest oil depots for storing the big stockpile of WTI oil in USA is a place call Cushing in Oklahoma, and tank farms of 76 million barrels are to the brim. Operators are fully booked. Storage jumped by 5.7 million barrels the week before. To add pain onto the onshore glut, there are also ~160 mil barrels of oil offshore on tankers waiting for buyers.

In simplest terms, the negative oil prices means the oil producers or sellers instead of selling, are now willing to pay buyers to take oil off their hands amid fears that most storage facilities will run out of space by the end of May.

There are speculative traders and real buyers (e.g. refineries) who needs the oil. And as contract settlements in May nearing with no more storage space, the speculative traders of the oil who does not need the physical oil is desperate to sell the contracts they owned. But there isn’t so many real buyers due to low demand.

Hence, if the speculative cannot find buyers of the oil for May, then they will have to end up taking the physical delivery of oil, with no place for storage. That is why they are desperate to sell even when it means paying money for the other party to own the oil contract. Hence at negative 37 bucks, meaning they are paying the buyer $37 a barrel to own the oil.

On Monday 20 April is the last day to settle the contracts for May. Oil prices began to rise again on Tuesday today 21 April as oil traders turn their attention to trading oil for delivery in June. Contracts not closed in May can be rolled over to June, but because of the contango resulting in huge spreads, it will result in big losses. 

WHY NO DEMAND

This is obvious, thanks to Corona virus which essentially shut down the most of the USA economy leading to low demand. The crisis was further compounded after Saudi and Russia engaged in a price-war to increase supply. Although cuts of 10 million barrels were further agreed, but market fear that the cut is insufficient. 

HOW ABOUT OIL COMPANY LIKE EXXON AND SHELL?

You can check their share prices which drop in share prices pale WTI plunge. These oil giants are comparatively less affected as their business are diversified into exploration (Upstream), refinery (Downstream) and Chemical etc. And these companies are not merely oil producers but also natural gas and chemicals sellers. These companies also invest long term into Upstream exploration business which involves projects that will only materialise few years later before the first oil is produced.

There is also a reason why you do not find Petrol of your car as cents per litres because it involves refinery and transportation costs etc. This is where Exxon or Shell refineries earn their profits. In fact the cheaper the crude oil, the lower the material cost for refiners. 

HOW ABOUT KEPPEL CORP AND SEMBCORP?

Likewise, Keppel Corp and Sembcorp who saw little decline in share price. Both Keppel and Sembcorp had been in progress of diversifying out of the Oil and Gas market since the 2015 oil crash which also revealed corruption cases in Brazil. Keppel has property businesses, Data REIT, Electricity, Infrastructure businesses etc. Sembcorp is involved in utilities, environment and energy, water industries etc with clients spread over the region in Asia, UK and ME.  Hence, the fall in pricing is not as drastic even when oil price tumbles yesterday. 

Nonetheless if oil demand continues to lag supply, it is a matter of time where these stocks will have share price sliding down too.

REPERCUSSIONS

USA is the largest producer of oil due to shale discovery in the last decade. With oil price hitting the floor, many oil producing companies are expected to go bust. Shale producers will be hit hard first due to their higher cost of producing oil compared to the traditional oil exploration of Middle-Eastern countries in particular. Also, USA is also 3^rd largest oil exporter. With oil price tumbles, revenue of the country will plunge as well.

Oil exporting countries who derived most of the revenue from oil are also going to suffer badly. Saudi is top exporter followed by Russia. Their move to increase supply few weeks back has backfired and slapped their own cheeks reducing their own countries’ revenue significantly.

Although internationally, the benchmark for oil is Brent Crude which is below US$20 per barrel, it is also a matter of time due to low demand, there will be the same problem as WTI.

Nearer to home is Malaysia, who is also net exporter of oil. If oil price declines greatly, the country’s budget deficit will rise. It is double whammy considering the shut-down of the country now due to Covid-19.

Singapore is net importer of oil, so we will be less affected. That said, the impact of historical low oil price will without doubt also have psychological repercussions to the local market. 

China Recovery or Plummet – Hear from the China Chinese themselves?

For more than a decade since early 2000s, I had been traveling to China for business until there was a change in the last few years when China is excluded from my work scope. Places in China I have stepped foot include, Beijing, Tianjin, Qingdao, Yantai, Nanjing, Shanghai, Nantong, Wuxi, Guangzhou, Shenzhen, Fujian etc. In the process, I had also made many friends.

Last week, I contacted a few China Chinese friends from different parts of China to find out the situation in China. Just to clarify, none is from Wuhan. The response is almost unified that life has more or less gone back to normal. Everyone has been at work for more than a month already. Even colleagues from Wuhan has returned to their posts. Work meetings continue, outings continue… Was told those who want to wear masks go ahead, those who do not feel like it, it is ok. But in work place, not many people wear masks. There is a general consensus that Covid-19 new infections are so low. And the new infections are mostly imported from border of China-Russia that are so far away from them, because China is after all so big a country.

However, everyone is still concern about the second wave of infections. More importantly, people are worried about business perhaps more than the second wave. Knowing the Chinese, the same feeling from before is still present now, such that the people are generally very confident and positive about their economy long term prospects and most of them felt that they can rely on their government to resolve any crisis.

CapitaRetail China Trust (CRCT)

You can say that I am influenced by my Chinese friends… my hands itched and nibbled on CapitaRetail China Trust. Below is an article I wrote in 2014 on CRCT.

CapitaRetail China Trust to Continue Thriving in a Pessimistic China Economic Outlook?

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What Should I Do in Stock Market Now?

This topic is probably one of the most talked about now?

What should I do in the stock market now? “If I have x amount of money, and tell me which stocks should I invest so that I can make maximum profit in the shortest time. It is not my concern about understanding the stock market, I just want to know if I should put in money now or later?”

If you are having the aforesaid mindset, it is likely that you will be disappointed by this article because it is impossible for me to provide you with tips that can make you be rich in the shortest possible time.

Nonetheless, I still provide my advice and what exactly I will do at the part of the conclusion.

For now, I really hope you can finish reading this article as it may be able to give you the true insight, rather than soothing words that deceive.

Stock Market not as lucrative as you think?

Do not be fooled by all those who taught making quick money in short time. Just like any other things in life, to be successful, you need hardwork, an expanse of knowledge and experiences over a long period of time.

One of my ex-bosses in his 60s who was a shrewd businessman also invested in the stock market for 30 years. He told me for 30 years, his stock market returns are almost no return, and perhaps even negative. On the contrary, he owned many properties and generates very lucrative returns. Of course, running and eventually selling his businesses gave him the most returns!

For me, it is quite similar. My stock market realised returns are not as lucrative thus far. The size of my financial portfolio is mainly coming from my work income. While not to boast, but I really work hard and diligently in my career. Another part of my portfolio is also from the properties owned, in which mortgage owed versus sell value is very low.

Money aside, I seriously learnt lot of things in the investment journey. I hated reading books in the past and never truly wrote articles in my life. However, because of investment, I dwell into reading and extensive research to understand things from different perspectives. I also fortified my financial knowledge apart from my engineering background. Then there is also learning from others, taking action, making failures and then learnt from mistakes.

Typical mainstream mindset

Gambler and opportunist

The short-term profit mindset is dangerous. It is gambling and can never generate sustain returns over long term. You may win this time, but next time, you can lose bigger. Also, you will be driven by emotions by the up and down swing of the market.

For example, I have a friend that when the Market started crashing in the middle of March, he was telling that STI will definitely goes below 2000. He wanted to wait for STI to drop below 2000. He reckoned it will be one of the worst crashes in history of STI. Then in the past week or so, when Dow Jones or STI continues its rally, he kept highlighting to me that market is rising and he started to worry of missing the opportunity of buying the bottom.

Self-proclaimed value investor

Likewise, the so-called long-term self-proclaimed value investor, but with refusal to learn and understand the fundamentals of the global financial market and big picture, is also equally dangerous. Maybe even worse off! This is because not only they cannot generate long term returns, they will be wasting a lot of time and effort for very little returns.

For instance, all the oil darling stocks in SGX from 2010 to 2014, no matter how well run they are, if the “big picture” oil price crash, they cannot escape reality of price crash. Once upon a time, Nokia was such an incredible company. But, the big picture of technology makes the company obsolete. Next, the former Valeant Pharmaceuticals had stock price risen from US$15to US$250 from 2010-2015, before crashing to less than US$10 due to evil ethnics in running the business being exposed by people with real knowledge in the industry.

The bigger picture, timing, as well as the knowledge of real business is important in stock investment and not just fundamental analysis or our self-proclaimed valued-investor title.

Herd Behavior

This is called herd behavior and it is the most common behavior that you and me can experience in a stock market. As described in the internet, Herd behavior is the behavior of individuals in a group acting collectively without centralized direction. What do we mean by “Acting collectively together”? In stock market, it simply means influenced by masses and act based on what we see now.

Several years back, I written an article “My Rewards from Learning Investment” and in it, I also explained why the majority mainstream is always wrong as most of the times, they only pay attention to themselves, their self-benefit in the short term.

It is the love of the truth! Understand the bigger picture

Instead, we must have “the love of the truth”.  The love to find out the cause and the effect throughout history, which leads to the system of today. And to understand what is inherently wrong in our current system or a company, and ultimately what is wrong will gets more wrong, and eventually leading to the truth which will destroy what is wrong.  

The first most important thing is to understand not just what, but also why the happenings in the world today. It is not just about the Corona Virus. It is not just about SG and STI. It is also not just about the stock market in the world. It is the understanding of the entire global financial system, going back into history and what is currently happening. It is about the Past, the Big picture and then the Localized picture.

This is quite complex as we have to understand Global financial situation and requires lots of reading and research, coupled with years of experiences. Then the understanding of yourself, and taking action, fail, learn and improve over time. It is not just about choosing one stock and boom, I earn XX amount of money over a very short period of time? Nothing in this world comes easy and fast. Even if it comes fast, it will go fast! So STOP DREAMING about quick success!

Understand History

Understanding history is important. The farther back you look and understand, the further ahead you can see, even when it has yet to take place. Therefore, it is beneficial to know the history of money (gold and silver), history of Federal Reserves (why USD as world reserves), history of past crisis (Great Depression, why World War took place, why GFC takes place), history of stock market behaviors in various crashes (charts) etc. Eventually how all these impacts will affect inter-countries. For instance, how the economy of USA and Europe or China will impact Singapore for that matter. The great investors of today’s time such as Ray Dalio and Jim Rogers studied history of the markets extensively.

I also written a lot of articles in the past. Refer to below.

Conclusion

Love the truth of this world. Read and research, and maybe also write about history of the financial markets. Once you understand the core fundamentals of why things are as it is today, then you will not be driven by irrational behaviors of the stock markets. In the process of acquiring the truth, you can try out your investments and see how you perform. Afterall, life is not just theory but practical and also about results. If you fail or lost money, make sure it is not your entirety and you can always bounce back. Learn and improve and produce better results the next time round. With extensive experiences and knowledge of the past, present and possibly foretelling the future, naturally you will have your own beliefs. With this faith, you can then formulate a direction or strategy based on your own personality. Know yourself. Do not follow others blindly.

Finally, what you should do now in the current stock market?

Who am I to tell you what you should do specifically in the stock market? Maybe I tell you what I have done so far RECENTLY:

What I have before the crash

After the oil crisis in 2015 onwards, and saw my entire office colleagues retrenched, I learnt to prepare for the worst. I believe financial systems fundamentally wrong with too much debts and eventually it will crash. It’s going to be ugly.  Hence, sold off a lot of my stocks in 2016, and put into Cash and Precious metals and a very little into Crypto. Focus on family and work life from 2016 to 2019. Never really invest until recently.

Recent Profit Taking

-       Sold off my good stock Keppel DC Reit which gave me more than double bagger.

-       Sold off my paper gold to take profit from my initial trades in 2016. Keep my physical Gold.

-       Sold off Bitcoin to take profits from my initial trades in early 2019.

Recent Purchase

-       Bought STI below 2.5K

-       Average down on SPH Reit.

Recent Shorting

-       Learn simple shorting of stock and without question pay a small sum of school fees.

-       Good experience in losing money. That is the only way to learn.

Beliefs

-       Dow Jones is still very expensive at 23-24K.

-       Unemployment in USA is 17 millions (>10%) second highest to Great Depression and yet Dow Jones is rallying.

-       Market is irrational. Fundamentals will surface. Not because of Covid-19 but because of the excess liquidity and debts.  

What to do now

-       Market is unpredictable now.

-       SO DO NOTHING FOR NOW! WAIT AND SEE!  

READ: 

Rolf’s View of the World and Singapore’s Economy - The Artificial Harvest of the Past (Part 1)

Rolf’s View of the World and Singapore’s Economy - The Artificial Harvest of the Past (Part 2 - continued)

Rolf’s View of the World and Singapore’s Economy – The whole world has been leveraging up! (Part 3)

Rolf’s View of the World and Singapore’s Economy – Is Singapore over-leveraged? (Part 4)

Gold and Silver – History always repeat itself (Part 3)

Gold and Silver – A peek into history to understand its impact on the world monetary system (Part 2)

Gold and Silver – Things you need to know before investing (Part 1)

What Is The Fuss Over Fed Rate Hike And Its Impact On Us?

Ray Dalio’s Exceptional Insight!

The 5 stages of an empire - Ray Dalio

“The Fallacy of "How to be Rich" from Investing in Shares (Part 2)”.

The Fallacy of "How to be Rich" (Part 1)