An Update on Oil

Ryan DresselRyan Dressel, Investment Analyst, Brinker Capital

As of January 29, 2015, the price per barrel of West Texas Intermediate crude oil stands at $44, down just about 60% since its 52-week high in June 2014 (See chart below). For each 10% drop in oil, forecasters seemed to gawk at the possibility of further price decline, citing global demand projections, U.S. energy independence from The Organization of Petroleum Exporting Countries (OPEC), and increased consumption from emerging markets. What they omitted from their projections, however, was the impact that U.S. and Canadian production had on OPEC from a political standpoint.

Crude Oil WTI (NYM $/bbl) Continuous (CL00-USA)

Source: FactSet

OEPC has not adhered to an individual country production quota since 2011, but with oil prices around $100 per barrel in recent years, it was relatively insignificant news. These high prices actually worked against OPEC by encouraging too much competition from North America. During that time, North American energy companies were in the midst of ramping up production from shale, oil sands and other sources that were previously expensive to produce (refer to graphic below). In fact, United States domestic production has nearly doubled over the past six years[1]. Eventually in mid-2014, global demand for oil began to lag supply, caused by weak economic growth in Asia and Europe, which sent the price of oil plummeting.

Source: BofA Merrill Lynch Global Commodity Research

Source: BofA Merrill Lynch Global Commodity Research

Facing pressure from these new low prices, OPEC met on November 27, 2014 to discuss curbing production in an effort to support higher price levels. Since OPEC’s production quota was abandoned, each member country was unwilling to reduce its output.

The indecisiveness at this meeting signaled some very profound conclusions to the market. First, it re-confirmed that OPEC continues to become a disorganized collection of countries, rather than an organized cartel. This is important because it implies that OPEC is no longer acting as a balancing agent in global markets, which can significantly increase volatility. The second conclusion made by the market was that Saudi Arabia is unwilling to cede its crude oil market share (12.2% of global production as of September 2014[2]). In a bold statement made last December, Saudi Arabia’s oil minister, Ali Al-Naimi, confirmed these assumptions:

“If I reduce, what happens to my market share? The price will go up, and the Russians, the Brazilians, U.S. shale oil producers will take my share,” Al-Naimi told the Middle East Economic Survey last month. “Whether it goes down to $20 a barrel, $40 a barrel, $50 a barrel, $60 a barrel, it is irrelevant.”

The final conclusion from the November meeting was that smaller countries who depend on oil as a large part of their government revenue, cannot afford to cut production. These countries include Iran, Iraq, UAE, Venezuela and Nigeria among others. Due to the fact that Saudi Arabia’s reserves far exceed other OPEC members (See graphic below), they can afford to wait out low oil prices while others cannot.

Source: IEA, BofA Merrill Lynch Global Commodity Research

Source: IEA, BofA Merrill Lynch Global Commodity Research

What to Watch For:

There are many factors to watch as it relates to oil and its impact on various asset classes, interest rates, credit quality, and foreign exchange rates. The two most important factors are U.S. producer inventories and the Saudi production rate.

As of January 23, 2015, U.S. oil inventories reached their highest December levels since 1930 (383.5 million barrels)[3]. According to Bank of America Merrill Lynch, it takes U.S. shale producers 6 -12 months to react to rising or falling prices. If aggregate inventory levels remain near max capacity while the U.S. production rate falls, it would indicate that drilling projects are being cancelled and would likely have a large impact on small, highly-levered shale players. In turn, this could increase the number of defaults on energy company debt, which would have a negative impact on fixed income markets. The timing of these potential defaults could be accelerated as the foreign exchange rate of the U.S. dollar continues to rise. A stronger U.S. dollar makes it more expensive to finance debt levels[4]. As previously mentioned, it is clear that the Saudis want to retain their market share and continue to drive out production from their competitors.

Internationally, it will be important to monitor global economic growth (especially in China and India), which affects demand. If demand stays relatively low, it will put additional pressure on smaller OPEC members to plead with the Saudis to cut production or take unprecedented actions to support their economies. Those countries may have their patience tested, as the International Energy Agency forecast an annual demand increase of just 900,000 barrels per day in their January report (unchanged from December)[5].

Geopolitical risk is also an important factor to watch. The instability in neighboring Yemen could threaten Saudi Arabia’s production. Elsewhere, ISIS and the conflict between Ukraine and Russia add uncertainty to the global crude oil supply.

As the price of oil continues to decline, investors are attempting to take advantage. The four biggest oil exchange-traded products listed in the U.S. received a combined $1.23 billion in December, the most since May 2010, according to Bloomberg[6]. Regardless, the market may require patience as the Saudis’ political chess game plays itself out while crude oil prices continue to decline.

The views expressed are those of Brinker Capital and are not intended as investment advice or recommendation. For informational purposes only. Holdings are subject to change.

[1] International Energy Agency, 2014

[2] U.S. Energy Information Administration, 2014.

[3] American Petroleum Institute, January 23, 2015

[4] Drilling, producing, and transporting oil is a very expensive process. As such, many U.S. energy producers require debt financing to fund capital investment. The total debt level of energy companies is approximately 16% of the U.S. High Yield Debt Market, which is almost four times higher than in 2004. Tudor, Pickering, Holt & Co. (TPH) has determined that at least 40 publicly held North American-focused E&Ps have reduced their 2015 capital expenditure guidance since December 8th by an average 31% from 2014 spending levels.

[5] Oil Market Report, International Energy Agency. January 16, 2015.


Selling for the Non-sales Professional Beverly D. Flaxington

Selling is a fact of life if you want to grow your business. Some financial advisors look at “sales” with negativity. You do not pursue a CFP, or a CFA or any other financially oriented credential, because you want to be a salesperson! In fact, in many cases the core skills necessary to be successful as a financial professional are in opposition to those needed for professional sales.
There are ways to learn how to sell successfully even if you are a non-sales professional. Once you learn how to think about selling, and how to incorporate it into your daily activities, you might even find you enjoy it.

Here are five keys tips for any non-sales professional:

(1) Define your goals. Yes, it sounds basic but this is the first important step – and the one most often overlooked. An advisor might say “I want to grow!” but they haven’t defined what success really looks like to them. Grow in what area? Client referrals? New prospecting opportunities? Through alliances? What about specific products and services? It’s important to define goals very specifically and write them down.

(2) Have a plan. This one also seems pretty basic, doesn’t it? Financial advisors create plans for their clients, so they must have plans for their own selling objectives, right? Unfortunately it’s a rare situation to find an advisor with a clear selling plan – who will do the selling, what are their individual goals, what compensation is associated with selling, how will the sales effort integrate with client service and investing, how will the efforts be measured, etc., are all necessary questions to be asked … and answered.

(3) Selling is an extension of meeting needs. Instead of thinking of sales as “pushing” something, think of it as offering a solution to a problem, or meeting an unmet need. The best salespeople are those that are passionate about what they sell, but realize that what they sell isn’t for everyone. Instead of thinking “sales”, think “understanding other people”. How can you learn more about someone so you can truly offer a solution? What kind of needs do you best meet? What problems do you solve? Change your thinking on the process to make it less about pushing and more about filling – an unmet need.

(4) Learn to qualify! Even the best salespeople struggle with this area. Not everyone is a good prospect. Do not spend too much of your valuable time with people who will simply never buy. Learn to ask probing questions such as “Why are you interested now instead of six months ago, or six months from now?” “What would success look like to you in 2 years if everything was going well with our relationship?” “What obstacles might you face in making a decision?” The more you question, the more you learn.

(5) Be yourself – but learn to adapt. In the end, the buyer is buying you – after all, you are your services in the financial advisory arena. You want to be genuine and show the real you. At the same time, understand that most people listen best and understand others when they have similar communication styles. Become an observer – watch the style of someone you are speaking to and modify to meet their approach. People buy from people they like, and we like people who are like us!
Incorporating any one, or more, of these five tips will start you on the path to being a successful selling professional.