Friday 18 December 2015

Oil continues its freefall making this year's performance one of its worst

I must be the first to admit that a few months back when Goldman Sachs sent out a report stating that they saw a barrel of oil dropping as low as $20 I became a bit skeptical to how such a figure could be bantered around and questioning whether this was just another pessimistic report that had found its way into the hands of media sensationalists following the Glencore story.

Looking back it did seem unlikely to reach those levels anytime soon as there seemed to be strained being experienced from OPEC member nations that were hampering good relationship built over the years which is why I thought a move to cut production would be on the cards soon. Added to this US shale gas producer had responded quickly to the drastic drop and began focusing on higher efficiency wells whilst turning off the higher cost ones.

This abated the fear within the sector...for now. With the recent OPEC summit being concluded at the beginning of December with no conclusive agreement to the amount of output that needed to be cut with Iran putting its weight down and literally telling the rest of the members that it will be engaging with the sale of over a million barrels per day sales into the market to recoup the capital inflows it wasn't afforded while sanctions had been placed on them from the West.

Today we sitting with oil prices below that last seen during the Financial Crisis, $35 seems to be the number most analysts are following which doesn't leave us far from the $20 predicted by Goldman Sach's. It looks as if the Saudi's are yet finished with their annihilation of the enemy, shale gas producers as $20 comes close to the break even to those suppliers.

With the Fed lifting rates for the first time in almost ten years this week and expected to continue doing so, I can't foresee any reason why the drop to $20 won't happen and if it's any consolation I think the lacklustre demand once the interest rates find the sweet spot in the US economy we'll see a fast move to the target. But until stay tuned to the story, it just keeps getting interesting.  
The drive towards healthier living and the measures of actions governments around the world have taken to curb smoking gains significant ground as the years go by. With taxation the easiest way instantly dents the affordability, health ministry's have been fighting a new scourge, counterfeit cigarettes that find their way into the market.

Speaking from experience in South Africa where illegal cigarettes being smuggled in from neighbouring Zimbabwe has exacerbated the decline in volumes sold by the big producers so much the government has allowed them to lower the price by selling a packet at a recommended selling price that has resulted in lower margins for producers and retailers alike but found a resurgence in demand.

However that's the least of their worries as an announcement made by French parliament yesterday implementing a law that requires cigarettes been sold in plain packaging being met with fuming anger by producer who are calling it an infringement on their right to create a uniqueness of their products.
I tend to see the argument that cigarette producers are trying to portray but the unfortunate truth is the detrimental long term effects suffered from people who have smoked ends up becoming a burden to the state who are already seeing the pressure building from an aging population on the national health system of these countries.

But here's the contradiction, if smoking is so bad why have governments around the world set in motion the liberalisation of marijuana sales and production?  
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