EDI­TOR’S NOTE

Financial Mail - Investors Monthly - - Contents - ROB ROSE email Rob on roser@fm.co.za

Few things im­pact peo­ple’s ev­ery­day ex­is­tence like oil

THERE ARE FEW com­modi­ties that have as fun­da­men­tal an im­pact on peo­ple’s ev­ery­day ex­is­tence as oil. Sure, wheat is pretty im­por­tant. But most of the oth­ers are largely for­get­table: the gold price is a fas­ci­nat­ing barom­e­ter of global risk, but doesn’t re­ally hit peo­ple’s pock­ets in the same way as oil. Equally, plat­inum ob­vi­ously has a ma­jor im­pact on the car mar­ket, but its price isn't ex­actly go­ing to be felt as vis­i­bly on the streets of Dur­ban or Soweto.

Oil is dif­fer­ent. For starters, it’s a big driver of in­fla­tion (cur­rently at 7% in SA), and it feeds di­rectly into taxi fares and petrol prices. This is then fac­tored into the price you pay for ev­ery­thing — from the fancy Bant­ing-style cau­li­flower curry at the lo­cal Wool­worths to the bread on the shelves at Shoprite.

So, in the­ory, the oil price col­lapse — 65% in less than two years in dol­lar terms — should have been a giant fil­lip for the world econ­omy. Sur­pris­ingly, it hasn’t worked out like that.

The In­ter­na­tional Mone­tary Fund (IMF) says in re­cently pub­lished re­search that it, too, is mys­ti­fied as to why the global econ­omy hasn’t got a kick-start from the fall­ing oil price.

“This out­come has puz­zled many ob­servers, in­clud­ing us at the IMF, who had be­lieved oil-price de­clines would be a net plus for the world econ­omy,” it says.

The an­swer is com­pli­cated, it seems, but in­cludes the fact that slow­ing de­mand for oil is at least partly to blame, and that cen­tral banks have al­ready slashed in­ter­est rates to rock bot­tom. One im­pli­ca­tion of this re­search is that per­haps there is less need to worry that the oil price has re­cov­ered from its $27/bar­rel low ear­lier this year to around $40. Still, pre­dict­ing the oil price is a mug’s game: no sooner has a con­fi­dent re­port come out declar­ing oil to have “passed its low” than it tum­bles back.

This roller­coaster has had a rather nasty im­pact on a blue-chip South African bell­wether, Sa­sol. As sea­soned jour­nal­ist Stafford Thomas charts in this month’s cover story, barely two years ago Sa­sol was look­ing in­vin­ci­ble, as it forged ahead with plans to build an $8.9bn plant in Louisiana in the US.

Then the oil price fell, and Sa­sol lost 40% of its value. It’s no sur­prise, of course: Sa­sol’s stock has shown a 73% cor­re­la­tion to the rand oil price.

Per­haps mer­ci­fully for Sa­sol, the rand’s par­lous per­for­mance against the dol­lar has helped soften the ef­fects of the oil slump. (Unique among SA cor­po­rates, Sa­sol has per­haps the only rea­son to thank Ja­cob Zuma for fir­ing Nh­lanhla Nene, caus­ing the rand to tank.)

In his well-ar­gued anal­y­sis, Thomas weighs up the pros and cons of in­vest­ing in Sa­sol right now, given the oil price un­cer­tain­ties. On bal­ance, it seems, the odds are tip­ping back in Sa­sol’s favour.

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