There is no news that raw materials prices are unstable and unpredictable. Countries dependent on the acquisition of natural resources have faith in relation to the price of certain goods or a group of goods. The final outcome of shock in the price of goods is usually an accident across the producer country and its citizens. Conversely, when commodity prices are traded on a long-term basis. In the first decade of the 21st century, the price of oil was appropriate when resource rich countries used high commodity prices. During this period, gross crude oil reached almost $ 144 in 2008.
In the last ten years, the price of oil has not been so benign. Crude oil Brent has fallen since the last financial crisis on the currency bar when oil prices fell as oil traders expected to plunge into recession fears. Since then, it has recovered again and in June June, brent crude sold at $ 115 a barrel, but again reached a multi-year low at the beginning of 2016, laying around the level of 30 euros. The harsh sale was the result of global growth concerns and the time when global demand is expected to become negative.
However, in the last 18 months the price of oil has been positive.
As usual, political issues have contributed to a high price, as tensions in trade, together with US political and economic sanctions against Iran, have continued since the beginning of the year. Only in the first nine months of the year the price of brandy crude was 28 percent.
Sanctions against Iran have a direct impact on the crude oil market, as US sanctions prohibit countries from buying crude oil from Iran. As a result, there is a lower demand for Iranian oil and thus a lower daily supply of oil. Due to these sanctions, the various countries have already completely reduced or stopped the purchase of Iranian oil. In fact, part of the rise in oil prices can be attributed to the concern that manufacturers will not be able to meet the production gap caused by the fall in Iranian oil exports when the sanctions entered.
But what we have been witnessing over the past six weeks is a partial change in prices recorded by the beginning of October. This regardless of the fact that sanctions for Iran came in last week.
Different market participants believe that the lower supply from Iran will be more than it will be prepared by other oil producers. In addition, the expectations of slower economic growth, which are all the same, also imply lower demand for oil. In addition, Washington also agreed that some sanctions would be relaxed and that eight countries would continue to buy Iranian oil. China, the largest buyer, is among eight countries.
The decline in oil prices is a benefit for consumers and a curse for producers. The latter include large oil exporters such as Nigeria, Venezuela and Russia.
The negative political and economic impacts of Venezuelan oil prices in recent years have been known to be very low.
Due to its dependence on the oil industry, the state has greatly reduced public spending, resulting in a shortage and marked increase in prices of goods and services.
The state was on the verge of a civil war. Countries heavily dependent on the price of volatile goods, such as oil prices, should find ways to diversify their revenues in order to mitigate as far as possible the negative consequences of falling commodity prices.
Washington agreed to avoided a few sanctions and allow eight countries to continue to buy Iranian oil. China is among eight countries
Investors should always consider that fixed assets are a risky strategy that normally does not generate income. An investor who wants an exposure of a portfolio to certain goods can invest in shares of companies operating in a particular sector.
However, direct shares of a listed company have several risks, such as the risk of default and matching. Risks can be mitigated, but not minimized wholly, if exposure to raw materials is accessed through an investment fund or a product traded. Such investments will reduce the risk of default and concentration risk, while at the same time the exposure of the portfolio is determined by the goods or type of goods.
Investors who choose a commodity fund with exposure to the oil industry will have shares of companies involved in the exploration, refining, storage and distribution of equipment.
While the fund will more or less fluctuate according to the value of the goods, default and concentration risks are lower, and the level or profits or losses will not necessarily mirror the movement of oil prices.
If it is still uncomfortable with the commodity fund in its portfolio, due to the volatility that is expected to show at least one multi-asset fund, which, in the mix of different classes of assets, holds shares of companies whose profits are related to goods and energy. Such assets usually provide an element of protection against higher inflation. Actually, with higher inflationary fears that are more obvious than ever, investing in commodities can also be a means of protecting against inflation.
Higher inflation is generally not positive for bonds and shares, but it can often mean higher commodity prices. In the past, commodity prices did not show such strong correlations with high quality bonds and stocks, so they can provide a real diversity when you really need it. However, you have to admit that riding with seineers is not yet complete, as political risks and growth problems continue to remain evident at the price of oil.
This article was prepared by Gabriel Mansueto, Head of Department and Senior Investment Advisor at Jesmond Mizzi Financial Advisors Limited. This article does not intend to give investment advice and the content in it should not be interpreted as such. The company is licensed to carry out investment services by the MFSA and is a member of the Malta Stock Exchange and a member of the Atlas Group. Directors or affiliates, including the company and their clients, are likely to be interested in the securities mentioned in this article. Investors should be aware that past profitability has not led to future performance and that the value of investments may decrease. For further information, contact Jesmond Mizzi Financial Advisors Limited at 67, Level 3, South Street, Valletta, at 2122 4410 or e-mail [email protected]