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There's little reason to fret that the recent sharp decline in the oil price is a sign that the global economy is slowing – instead it's more likely that the price is being manipulated by one of the world's biggest exporters of the commodity, according to Chief Investment Officer Haig Bathgate.

While the price of anything is always determined by supply and demand, the question of late has been whether the drop – the price of Brent crude has fallen to its lowest since September 2009 – is due to a major slump in demand across the globe or a more technical issue. The improving global economic outlook, with the US reporting very healthy job numbers recently, shows that the economic argument for the fall is not convincing.

Instead, it's probable that Saudi Arabia is keen to reclaim market share in the oil and energy market, where it has been threatened in recent years by more marginal entrants into the industry such as shale gas producers. These marginal producers need the price of energy to be at a certain level to make extraction economically viable and a lower price could put them out of business. Saudi Arabia, with its abundance of oil, can produce at a lower cost than most, and is probably flooding the market. It can then cut back on supply at a later stage, and raise the price, after it has knocked its competitors out of business.

The falling oil price has ramifications across the world: it's not good news for Russia, which is heavily dependent on oil for foreign revenue and is already being hit by sanctions in relation to its alleged involvement in the war in Ukraine. In the US however, the falling price may well boost growth in a situation where the raising of interest rates, a damper on economic activity, seems to have been pushed back.

Haig, speaking BBC Radio's Good Morning Scotland, also commented in advance on earnings at Sports Direct and Superdry.

 

GARY ROBERTSON

Now, oil prices continue to fall, it's having a big impact on business. Let's get more on this from Gillian Marles. Good morning, Gillian.

GILLIAN MARLES, Reporter

Yes, good morning. The oil price has a reached a new five year low, it's now below $65 a barrel and the falling price continues to affect the stock markets as well - the FTSE down 45 points to 6,500. The Dow Jones down 268 points, that 1.5% at 17,533. Well, let's speak to Haig Bathgate of Turcan Connell, he joins us from Edinburgh. Good morning to you, Haig.

HAIG BATHGATE, TCAM

Morning, Gillian.

GILLIAN MARLES

Oil prices down 40% on a year ago and we had this, kind of, sharp fall yesterday, I suppose what's moving the price is the prospect that nothing is really going to change in the middle term, anyway.

HAIG BATHGATE

Yes, that's right. What the market is trying to work out is whether this is being driven by technical factors through the Saudis, effectively increasing supply irrespective of the underlying price or whether it's actually pointing to something more sinister, like a slow down in global growth.

GILLIAN MARLES

Yes, and we has OPEC saying that the forecast...when it released its forecast yesterday, saying that demand wasn't going to rise anytime soon. Is OPEC looking to global demand then, do you think, or the global growth prospects then and that's how it's working out its demand?

HAIG BATHGATE

Yes, I think so; I mean a lot of the supply and demand dynamics are cyclical, so clearly you can get a short term factor impacting demand and supply. We actually think that this is a deliberate strategy by the Saudis to increase their global share of oil supply, we've heard a lot about marginal developments like the shale oil and gas works in the US increasing supply recently and what we think is this is a deliberate attempt by the Saudis to regain market share by effectively forcing the price lower rather than it being something more sinister in terms of global growth.

GILLIAN MARLES

So, what, they would force some players out of the market, would they - is that how it would go?

HAIG BATHGATE

Yes, that's effectively what they did. They did an equivalent thing in the mid '80s when they were starting to lose market share and they deliberately forced the price of oil down to take more marginal players to out and in doing so, obviously, increasing their market share and then they can gradually increases prices in the future again. The other interesting geopolitical dynamic with this is as well is the impact it's having on Russia, of course, the US have imposed a number of sanctions on Russia and Russia are very dependent on the oil price, so this is putting a lot more pressure on Vladimir Putin as well.

GILLIAN MARLES

Looking a the stock markets in the States it wasn't just the price of oil affecting stocks there, there is this prospect of higher rates and that's also spooking the markets, isn't it?

HAIG BATHGATE

Yes, I think that's right, I think the interesting thing with this is the prospect of interest rates increasing any time soon has been pushed out. Our belief was always that the US would increase before any other western market economy but I think that's been pushed out quite significantly now and, actually, we think this is...I mean, again, it's quite unsettling because it has all sorts of knock-on ramifications but this is a big positive for global growth, it's big positive for the US consumer as well where gasoline prices are very relevant in terms of impacting disposable income.

GILLIAN MARLES

Okay, Haig, looking to market news or company news rather today - Sports Direct reports the owner or controlling owner Mike Ashley, he has a finger in many pies, not least Rangers - what are we expecting today?

HAIG BATHGATE

Well, I think it's been a tale of two halves for Sports Direct, obviously with England's exit from the World Cup that led to some disappointment early on in terms of replica kit sales but it's been quite a strong end to the year. As you say, Mike Ashley has a finger in many pies, one of those pies is being his stake in Tesco, which obviously hasn't worked so well hitting a 12 year low in share price terms recently, but again it's a goo barometer to see how the UK economy is performing and how consumers are spending.

GILLIAN MARLES

We've also got SuperGroup, which owns the Superdry brand...I had to ask some younger colleagues in the office about that...fashion - has it been affected by the warm weather like Next?

HAIG BATHGATE

Yes, absolutely, I think again with it being a slightly warmer autumn that means that the winter sales haven't really come through. We're expecting profits to fall around a fifth and it's obviously down to fashion and how fashionable Superdry is, it's kind of high end, sort of, trendy brand, so that can fallout of fashion very quickly, so it's going to be interesting to see what they're reporting.

GILLIAN MARLES

That explains why I've never heard of it. Thank you very much indeed, Haig Bathgate of Turcan Connell.

This content was generated prior to Turcan Connell Asset Management Limited operating as Tcam.

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