Picture your Future. Save for it by earning 1.5% on a 1-year Term Deposit Account! Learn more.

Franklin Templeton Insights: What’s driving Oil Market Volatility?

Fred Fromm, vice president, portfolio manager and research analyst with Franklin Equity Group, explains why recent oil market demand and supply shocks are essentially unprecedented and are leading to oil prices that are uneconomical for almost all market participants.

At Friday’s OPEC+ ¹ meeting, Russia balked at supply cuts to offset the reduced demand we see from the spread of COVID-19. In response, over the weekend, Saudi Arabia dropped its export prices across the board, essentially starting a price war in the global oil markets. The idea seems to be to force Russia to come back to the bargaining table and agree to supply cuts.

We believe the combination of both a demand shock (from the coronavirus outbreak) and a supply shock (from the price reductions) is essentially unprecedented, with no equivalent in the last 30 years that we can point to.

Outlook

The oil prices we are seeing currently are uneconomical for almost all market participants, in our opinion. While higher-cost producers like US shale clearly cannot generate profits at these levels, we believe even cheaper producers like Russia are likely to see challenges in this price environment. Saudi Arabia, while having very low production costs, also has domestic spending needs that likely require oil prices to be higher in the long term as well.

Despite this, we believe there is continued room for prices to remain depressed in the short term, or even for the rest of 2020. Oil prices quite often under- or over-shoot price levels indicated by market fundamentals and may take time to settle back to normalised levels.

Longer term, energy markets tend to be self-correcting with low prices leading to supply reductions that balance the market, and we believe we are likely to see significant supply destruction at current prices as drilling activity is either deferred or halted, particularly among smaller producers and those with poor balance sheets. While this could be healthy for oil markets longer term, it will be painful in the short term, and will impact multiple industries both within and outside of the energy sector.

We continue to have confidence in higher-quality producers and integrated oil firms. These are likely not just to endure through a period of lower prices, similar to what we saw in late 2015 and early 2016, but are also likely to be able to position their businesses well for the inevitable recovery in the markets. We do believe this process will take some time, however, as the market digests the impacts of the multiple factors driving prices down.

¹ OPEC+ is an alliance of oil producers, including members and non-members of the Organization of the Petroleum Exporting Countries.


 

Franklin Templeton Key risks & Disclaimers:

Important Legal Information

This material is intended to be of general interest only and should not be construed as individual investment advice or a recommendation or solicitation to buy, sell or hold any security or to adopt any investment strategy. It does not constitute legal or tax advice.

The views expressed are those of the investment manager and the comments, opinions and analyses are rendered as of publication date and may change without notice. The information provided in this material is not intended as a complete analysis of every material fact regarding any country, region or market.

Data from third party sources may have been used in the preparation of this material and Franklin Templeton (“FT”) has not independently verified, validated or audited such data. FT accepts no liability whatsoever for any loss arising from use of this information and reliance upon the comments, opinions and analyses in the material is at the sole discretion of the user.

Products, services and information may not be available in all jurisdictions and are offered outside the U.S. by other FT affiliates and/or their distributors as local laws and regulation permits. Please consult your own professional adviser or Franklin Templeton institutional contact for further information on availability of products and services in your jurisdiction.

Issued in the U.S. by Franklin Templeton Distributors, Inc., One Franklin Parkway, San Mateo, California 94403-1906, (800) DIAL BEN/342-5236, franklintempleton.com—Franklin Templeton Distributors, Inc. is the principal distributor of Franklin Templeton’s U.S. registered products, which are not FDIC insured; may lose value; and are not bank guaranteed and are available only in jurisdictions where an offer or solicitation of such products is permitted under applicable laws and regulation.

CFA® and Chartered Financial Analyst® are trademarks owned by CFA Institute.

What are the risks?

All investments involve risks, including possible loss of principal. The value of investments can go down as well as up, and investors may not get back the full amount invested. Stock prices fluctuate, sometimes rapidly and dramatically, due to factors affecting individual companies, particular industries or sectors or general market conditions. Investing in the natural resources sector involves special risks, including increased susceptibility to adverse economic and regulatory developments affecting the sector. Growth stock prices may fall dramatically if the company fails to meet projections of earnings or revenue; their prices may be more volatile than other securities, particularly over the short term. Smaller companies can be particularly sensitive to changes in economic conditions and have less certain growth prospects than larger, more established companies and can be volatile, especially over the short term. Investing in foreign companies involves special risks, including currency fluctuations and political uncertainty.



MeDirect Disclaimers:

This information has been accurately reproduced, as received from Franklin Templeton Investment Management Limited (FTIML). No information has been omitted which would render the reproduced information inaccurate or misleading. This information is being distributed by MeDirect Bank (Malta) plc to its customers. The information contained in this document is for general information purposes only and is not intended to provide legal or other professional advice nor does it commit MeDirect Bank (Malta) plc to any obligation whatsoever. The information available in this document is not intended to be a suggestion, recommendation or solicitation to buy, hold or sell, any securities and is not guaranteed as to accuracy or completeness.

The financial instruments discussed in the document may not be suitable for all investors and investors must make their own informed decisions and seek their own advice regarding the appropriateness of investing in financial instruments or implementing strategies discussed herein.

If you invest in this product you may lose some or all of the money you invest. The value of your investment may go down as well as up. A commission or sales fee may be charged at the time of the initial purchase for an investment and may be deducted from the invested amount therefore lowering the size of your investment. Any income you get from this investment may go down as well as up. This product may be affected by changes in currency exchange rate movements thereby affecting your investment return therefrom. The performance figures quoted refer to the past and past performance is not a guarantee of future performance or a reliable guide to future performance. Any decision to invest in a mutual fund should always be based upon the details contained in the Prospectus and Key Investor Information Document (KIID), which may be obtained from MeDirect Bank (Malta) plc.

Share on facebook
Share on linkedin

Experience better banking

The sooner you start managing your money, your way, using the best-in-class tools, the sooner you’ll see results. Sign up and open your account for free, within minutes.

Latest news articles

All News

BlackRock Commentary: Why we still prefer stocks over bonds

Equities have fallen hard this year on the prospect of rapid rate increases to rein in inflation, the tragic Ukraine war and a slowdown in China. BlackRock think equities remain more attractive than bonds, even as the historic sell-off in bonds has cut the gap between the two.

All News

Notes from the Trading Desk – Franklin Templeton

Given recent declines, there is much discussion around what is priced into market. With global markets declining for six consecutive weeks, there is an increasing debate over how much bad news is priced in, and whether markets are now oversold.

Login

We strive to ensure a streamlined account opening process, via a structured and clear set of requirements and personalised assistance during the initial communication stages. If you are interested in opening a corporate account with MeDirect, please complete an Account Opening Information Questionnaire and send it to corporate@medirect.com.mt.

For a comprehensive list of documentation required to open a corporate account please contact us by email at corporate@medirect.com.mt or by phone on (+356) 2557 4444.