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Gartman, Citi: Fundamentals, Valuation Point To Upside for Oil
Aspire | 01 September 2015
By: Lim Si Jie
Articles (169) Profile

Source: TradingView

“Where will the oil price go from now?” is the billion dollar question that every investor in the market is asking right now. The market is currently in a classic bear-market state where positive news gets ignored and bearish market elements get seized upon. Despite the falling oil prices, there is a growing number of thought leaders who are increasingly bullish on oil prices, including commodities king Dennis Gartman and Citi Research.

Primary Reason for Decline: Surging Supplies

The oil-price decline was primarily driven by surging supplies. Major producers have been increasing production, with Saudi Arabia, Russia and Iraq hitting record output levels. A report recently released last week showed that Saudi Arabia’s June production and exports have climbed even higher.

Worries over China and Japan Economies

The bearish sentiments were reinforced by a new element of shaky demand due to worries over the key Asian economies of China and Japan. China’s economy has been slowing, and it has taken a big hit recently from the crash of its Shanghai stock market. The move to devalue Yuan to prop up its economy has been viewed by the market as a signal of possible slowdown in the Chinese economy.

On the other hand, Japan has posted a negative gross domestic product reading for the most recent quarter, ending hopes of a sustained economic rebound emanating from the massive easing measures of Bank of Japan.

Concerns of Diesel Fuel Glut and Rising Dollar

Crude-oil prices have been declining over the past month. West Texas Intermediate (WTI) oil prices look like they could trade down to at least the low USD 30.

There has been significant increase in refining capacity for Saudi Arabia and China, which is in the process of creating a global diesel fuel excess. This is likely to spark off the next leg of lower oil prices.

Crude oil is a US dollar-denominated commodity, so the strengthening of the US dollar from the looming Federal Reserve interest-rate tightening cycle is expected to add to the downward pressure.

Considering the possible impacts of a diesel fuel glut and rising dollar strength, Capital fund manager John Kilduff has not ruled out the possibility of crude oil prices falling to mid-USD 20s.

Falling Capital Will Affect Production

However, analysts from institutional research Johnson Rice predict that a decline in US crude production will reverse the slide in oil, with prices possibly hitting USD60 to 65 per barrel by the end of the year.

Ron Mills from Johnson Rice notes that the drop in capital has already led to a decline in the number of rigs in operation, slowly leading to a decline in US crude oil production. Mills believes that the capital cuts will get “even greater over the remainder of the year”. Funds in the equity and debt markets have become unavailable to shale oil producers and Mills expects commercial banks to become much more conservative and/or reduce companies’ access to capital.

Gartman Turning Bullish On Crude Oil

Gartman, who is sometimes referred to as the “Commodities King”, is also in consensus that oil price will recover. While Gartman previously warned that oil could hit USD15 a barrel by the year’s end, he has since turned bullish on the commodity, citing structural shifts in the crude market.

The contangos in both Brent and WTI have narrowed as crude oil prices moved lower. The averaged front-month contango for Brent and WTI has narrowed to USD 7.19 a barrel from USD 7.72 on Thursday and USD 8.24 earlier last week. Contango occurs when a commodity trades above the expected future spot price. Gartman views the narrowing of the spread between a futures contract and an underlying asset as a sign of crude oil’s impending strength.

Citi: 45 Percent Upside From Cheap Oil Stocks

With the price of crude oil at a six-year low, Citi believes that the big oil stocks are finally cheap enough for one to start buying.

Citi notes that the sector now trades at a 1.2 times price-to-book ratio, which is below the trough valuations in 1Q 2009 and 4Q 1998, periods when crude prices have also collapsed. When the industry does drive profitability back to midcycle levels, the sector can trade at a fair value of 1.75 times book, which represents a 45 percent price upside from the current level.


Si Jie is no stranger to investing having started his journey at a young age. He is heavily influenced by acclaimed investors such as Benjamin Graham, Peter Lynch, and John Rothchild.

Please click here for more information about this author.

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