Last week, many of us experience, AGAIN, a steady decline in the share prices for almost all export counters, be it gloves, semi-conductors, plastic, furnitures.. Rational investors will know that this sell off may be due to combination of many factors.
But still, i feel like to share some of my view on this ringgit/oil issue, and in particular, the reaction between, oil price, dollar and ringgit.
My understanding of the events goes this way:
Ringgit depreciation has started when Fed hint to start tapering. The news first came out in around Jun 2013. Until 18 Dec 2013, Fed confirmed tapering to start in Jan 2014. Thereafter Ringgit has kind of stabilized around RM 3.20.
Out of blue moon, the market started to worry about economy growth of second largest economy, China. The bad news went viral and we started seeing oil price to fall through below USD 100 per barrel somewhere in Sept 2014. Then whole oil drama started. Oil price keep failing down. So do our ringgit.
The oil price continue to fall, and touched at low of about 50 dollar in around end 2014 - early 2015. RINGGIT was around RM 3.50 to RM 3.80 per dollar.
Now, there are 2 part of the supply and demand story
(1) slow down of the world economy- Traditionally, Saudi Arabia and other OPEC countries will adjust the supply based on demand, so as they can continue to enjoy the expensive petrol money to fund their economy.
(2) New player- SHALE OIL which USA has the largest shale oil reserve in the world (green river formation) which estimated at 2 trillion barrels, 2 times more than Saudi Arabia reserve.
Below chart show the output oil by USA.
Because of above, Saudi is blaming USA who has flood the market with shale oil and causing the oil price to drop drastically. OPEC used to have the role of balancing the demand-supply based on economy condition. With the shale oil flooding the market, the role somehow not works.
In January 15, saudi has decided to defense his oil producer taigo position. Saudi from the role of maintaining balance of supply-demand , turned to aggressive strategy - Increase the output to drive down the price, so as to deter the shale oil producers.
Below is the Chart of Saudi Arabia crude oil production, which is rather flat prior to march 2015. And Max their production from March 15 onwards.
The oil price, once again, broke through the USD 50 mark, and went down all the way to 27.5.
Our ringgit also broke the ceiling of 4.00 and all the way to 4.40.
The fight between crude taigo, Saudi Arabia VS shale taigo, USA has made other countries suffered. Russia, then spread the news says talk is on going between OPEC members to cut production. The oil price back above USD 30 and now stay around USD 35. OPEC, however, denied such talk is initiated or on going.
Anyway, because of that rumours, Ringgit has also advance to about RM 4.10 to RM 4.20 level.
The question now is, is the oil going back to USD 50 again?
My understanding is:
(1) SAUDI need EXPENSIVE OIL TO FUND THEIR LUXURY ECONOMY
(2) USA need CHEAPER OIL TO LOWER THEIR COST AND FREE OUT MORE CASH TO SPEND
(3) Ringgit will YO YO when the oil price is YO YO
(4) World economy is still very weak to push the demand.
(5) USA is determined to be OPEC oil-Independent. Not only that, they also want to max the shale oil potential. And, if possible, be the main exporter of shale oil and shale gas, to the world. If i remember correctly, USA is already now the leader for shale gas exporter to the world. After all, they got 2 times more oil reserve now, compared to Saudi Arabia.
(6) Every Time when oil price up, it offers opportunity for USA shale oil players to reactivate the oil rig and to flood the market with shale oil.
Let see what happended in OIL RPICE VS "USA RIG COUNT" VS RINGGIT
From above combination chart, it may not be the accurate comparison but i use it to "guess" where the ringgit is going.
(1) I'm not sure the percentage of the shale + crude oil rig numbers from the above rig count chart, but i assumed the overall rig count number reduction is what saudi arabia wanted to see.
(2) I noticed that when oil is at around 50, the rig count started falling and the fall kind of flatten when in between 55, and when oil going back up to 60, the rig count increased again. Is 50 to 60 dollar oil the current threshold price for USA to reactivate their oil rig?
(3) With the technology advancement in USA shale oil industry,will the threshold price for USA shale oil rig to re-activate back be lower and lower? 40? 30?
(4) Will the oil to stay below 50 dollar for the next many years? What is going to happen to our Ringgit? Above 4.00 become a norm?
Let wait and see.
Now, for Thong Guan, Scientex and other plastic companies, i believe they will continue to enjoy low raw mat cost as i don't think oil will go up back to 60 in near future, the price which the plastic film already enjoy very good operating margin.
For all export companies, i also don't see any sign that ringgit will continue to climb back above 3.80 if to use oil price as indicator. Of course, other fundamental issue of our country will also determine the ringgit direction, Example, less oil dependence. This is how i view.
Anyway, I am always optimistic with the companies i invested in. The oil/ ringgit price will change in the split of seconds, but the business we invest in don't response in such speedy manners. We are not economist or speculators, we are just minor shareholders of the business we invest in. And business need time to run, to generate profit.
This is how i judge.
One thing for sure,
WHEN THE CRUDE OIL PRICE STABILIZED, THE MARKET ALSO STABILIZED.
MARKET DON'T LIKE UNCERTAINTY, WHEN THINGS RETURN CALM, SHARE PRICE OF GOOD COMPANIES SHOULD UP GRADUALLY.
Cheers.,
YiStock
Additional Note:
All my articles are for reading pleasure only and should not be treated as buy/ sell call on any particular company mentioned in the articles.
I can never be 100% sure on the data i sourced and correctly predict the performance of the company I invest in. My investment strategy is very simple, If the business fundamental has not change, i will buy in whatever amount i can when there is a price correction. On the other hand, once i start noticing sign of deterioration, i will immediately cut the profit / losses. I only take care of downside, the upside will take care of itself
If i missed any investment opportunity, i will acknowledge i missed it. If i make a mistake on judging the source of info or material i read on certain company i invest in, i will only blame myself and vow to do better in future.
My strategy is FA come first, and forever FA.
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