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Michael Savy Blog post by Michael Savy

2015 Share Market & Equities Outlook – Part 1

2014 Wrap Up and the Oil Market

If you’ve driven past a petrol station recently, you would have noticed the incredibly low price. By now, you would have already noticed the volatility in the oil market in recent months. What does this mean for our economy and the global market? Watch our 2015 Share Markets and Equities Outlook before making any investment decisions today!

The 2015 Share Market and Equities Outlook is broken into Three Parts as below. Click on the links to learn more:

Part 1: 2014 Wrap up and Oil Market
Part 2: Hard Minerals & Global Market – Asia, US & Europe
Part 3: Sectors in the 2015 Australian Market – Mining, Retail, Healthcare and more

[Transcript]

Ben: Hello. Ben Kingsley here, CEO and Founder of Empower Wealth and I’m here with Michael Savy, the head of our Financial Planning Division and we’re going to be talking about the 2015 Share Market and Equities Outlook.

But before we do, let’s recap 2014. Michael, how did you see the second half of the year pan out?

Michael: The second half of the year was a little more difficult than the first half. We started the year well but the second half, we saw the commodity prices come off quite significantly with the hard commodities being copper, iron ore and those areas. Then in the latter half of that, the last couple of months which we all would have experienced, the oil price has come up quite a bit.

Ben: Yeah. So I mean we saw a little mini rally just before Christmas. Was there any reading to that in terms of probably a bit more optimism than pessimism?

Michael: Look, I think the mini rally there was a slight correction from the oversold …

Michael: … in late November. We had a drop in October and subsequently November and that ran back up to where it was. But as we lead into this new calendar year, it’s certainly a little bit more volatile and we’re seeing that with the 200, 300-point moves in the US market which obviously flows through into the Australian market.

Ben: OK. So let’s dig a little bit deeper around oil and also those hard minerals, so those hard mining assets. So talk to me a little bit about oil. What’s your read around the oil market? Why is it doing what it’s doing?

Michael: Look, at the moment, the production – there is certainly a little bit of oversupply in the market, I think somewhere into the – around about two million barrels a day at the moment. Part of that problem is because of the amount of production that the US through the shale oil production is adding to the pot.

Ben: Yeah.

Michael: On the flipside or on the other side of the equation, we have the demand side. Globally, we’re expecting or we have been forecasting that demand is going to be a little bit softer partly through China and Europe.

Ben: Yeah.

Michael: So when we play those two factors out, there is a suggestion that oil prices should be going down. But should it be dropping to the 40 or 50 percent that we’ve sort of seen? That’s a different question there.

Ben: So OPEC which is obviously the major conglomerate that produces the majority of the oil for the globe, what’s – what do you think their decision is to keep oil production at current levels? I mean is there – what’s behind that?

Michael: Look, there are a few theories around that and in part, one of the more popular ones is obviously around the US production. US, the US contributes around about $9 billion or $10 billion at the moment per day.

Ben: Dollars or barrels?

Michael: Sorry, barrels. Ten million barrels per day.

Ben: Yeah.

Michael: OPEC generally produces around about 30 million, of which Saudi Arabia add about 10. So the US is actually producing on par at the same rate as the Saudis.

Ben: So basically the US has become a net exporter of oil as opposed to an importer of oil, because of the shale gas and there are new technologies that have allowed that. But obviously it’s a little bit more expensive to get out of the ground, isn’t it?

Michael: That’s right, that’s right.

Ben: So is that why we’re seeing OPEC sort of making a call to sort of say, OK, well, if I can – we price oil at a certain point, there might be some producers who can’t sustain their operation. Then we can potentially look …

Michael: That theory is very much based on a geopolitical or strategic move by the Saudis in terms of – at the moment, they’re probably looking to shore up their market share. Pre-GFC, when Shell production or US production was probably five million barrels per day, they could drop their production rates down a little bit. But at this stage – which they did. They dropped their production rates so that the surplus went to around about – I think it was four billion – four million barrels.

Ben: Yeah, yeah.

Michael: So they had that capacity of doing so. But now when the US is theoretically their largest competitor, they cut back their production. Then they will lose market share to the US.

Ben: OK. And if we impact them – and oil basically is such a major commodity. Other than money, it’s the biggest commodity on the planet. So when we see prices down, you know, sub $50 a barrel, that’s obviously going to have flow and effects to manufacturing and to industry and obviously at the barrels like you said earlier.

So the question then is that’s actually a good thing for the global economy, isn’t it? I mean it just makes inflation – that sort of falls away because of the – you know, the amount of stuff that we produce from oil is incredible, isn’t it?

Michael: That’s right. Oil is a key input in production and also for consumption for a lot of the OECD countries.

Ben: Yes.

Michael: So that’s the big picture item here in that low oil prices would certainly impact certain economies harder than others. But it will also benefit a lot of the OECDs and developed markets. The IMF recently just came out and said that they estimate that the reduction in oil price will probably add point three to point seven to global GDP.

Ben: That’s fantastic.

Michael: Domestically in Australia here, if we think that we’re a large consumer, the price drops so far, it has actually added – sorry, the price drop at the moment that we’re feeling is the equivalent for a standard – if you had a $300,000 home loan, that’s a 0.3 percent interest rate reduction. That’s what it equates.

Ben: Point three, so 30 basis points.

Michael: Thirty basis points.

Ben: That’s interesting. So obviously – so from roughly a dollar fifty a barrel. A dollar fifty a litre down to around just above a dollar.

Michael: That’s right. So for most – the average household generally when you go to the pumps, you will probably put in 14 litres into the tank.

Ben: Yeah.

Michael: Which would probably be about $55, $60 now we’re paying. So we’re saving ourselves probably $20 a week on that.

Ben: Fantastic. So that’s disposable income coming into the household, hopefully getting spent and impacting GDP. So that’s great. So from an oil point of view, it’s actually potentially a blessing in disguise and it could stimulate some global growth and some global activity. Let’s talk about minerals and hard resources.

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