Will Oil Demand Collapse?

Asad Dossani

Many of my recent articles have focused on crude oil supply. Namely, the demise of OPEC. And the rise of shale producers. The end result is a well-supplied market. One that keeps a lid on prices. But what about the demand side?

Ten years ago, the consensus was that demand would increase relentlessly. As nations such as China and India developed, they'd consume more oil. More vehicles. More flights. More industry. All powered by crude oil.

The reality has been more muted. Yes, there are more vehicles, flights, and industry. But much of it is powered by natural gas. Natural gas is both cheaper and cleaner than oil. Crude oil demand has gone up, but less than expected. And in many developed economies, crude oil demand has been flat or declining.

Today, we are faced with a new consensus: that oil demand will collapse over the next generation, mostly because of climate change. As per the Paris climate accord, each country has to curb emissions by reducing crude oil consumption and increasing the use of cleaner and renewable fuel sources.

Some recent headlines add to this story. For example, France plans to ban petrol cars to by 2040. Of course, this is easier said than done. Governments may try to reduce oil demand. But the people have to want it.

Headlines aside, crude oil demand isn't going to collapse. The economic arguments don't support that. The most important one is that supply is plentiful. Plentiful supply means low prices. And low prices reduce the attractiveness of alternatives.

Will there be a big shift to renewables if crude oil is cheap? Probably not. The shift will occur. But it will take time. It will be gradual rather than abrupt. The twin factors of high supply and slowly waning demand mean crude oil prices will stay low. But the world will still consume plenty of crude oil.

Understanding the fundamentals of the crude oil market means you can profit from it. In my latest course, Derivtantage, I show you exactly how to do this. The best part about crude oil is that you can trade it with a small stake. The crude oil mini futures contracts allow you to take a position for just under Rs 3,000. Let's hope that when the MCX introduces options, they use mini contracts.

-----------------------------------------------------

Market Notes

A Simple Way to Spot Turnaround Stories

Last time, we showed you how a high and increasing level of promoter share pledging can be detrimental to stock prices. The average five-year CAGR returns of stocks whose promoters pledged more than 50% of the shares and whose share pledging had increased over time were -5%. Furthermore, these stocks generated negative returns 63% of the time.

If a high and increasing level of promoter share pledging leads a stock to underperform, shouldn't a low and decreasing level of promoter share pledging lead to outperformance?

Logically, it should. But backing it with historical data would be an icing on the cake.

So we looked into promoter share pledging at S&P BSE 500 companies from FY2011-16. We'd already calculated the five-year CAGR returns of the stocks whose promoters pledged more than 50% of the shares and whose share pledging was increasing over this five-year period.

So we went further and calculated the five-year CAGR returns of stocks whose promoters pledged less than 5% of the shares and whose share pledging had decreased over the five-year period.

As you can see in the chart below, the results are simply incredible.

Average Five-Year CAGR Returns

The average five-year CAGR returns of stocks with promoter share pledging below 5% and reducing over time was 22%. This is a massive outperformance of the Nifty (6%) and companies with high and increasing promoter share pledging (-5%).

Sixty-one companies had promoter share pledging at less than 5% and decreasing. Of them, 52 generated positive returns. That's a success rate of 85%!

Now, of these companies, the maximum returns were 132%. And among the nine that generated negative returns, the minimum was -20%.

The data is crystal clear: Avoid companies with high and increasing promoter share pledging and consider companies with low and decreasing promoter share pledging.

Now, how can this data help you spot turnaround stories?

Promoters pledge their shares to raise funds. They usually do so when they are in financial distress. So when promoters release their pledged shares, the company's situation is likely improving.

Promoters can raise funds from various channels. When they are unable to raise funds from other sources (because of already piled-up debt), share pledging is the last option.

But when they want to deleverage, they release their pledged shares first. This is because it is their power at stake. In certain situations, if the lender needs to sell the promoter's pledged shares to recover their capital, the promoter could face the threat of a takeover.

So when the promoter's financial situation starts to improve, the first thing they do is release their pledged shares. A decrease in pledged shares means a rise in the promoter's stake, and this is almost always a good sign.

Pledged shares can also decrease when the stock price rises. The lenders tend to release a portion of the pledged shares as the collateral value increases, i.e. when the stock price rises. This could also be an early sign of an improving situation.

Whatever the case, a low and decreasing level of promoter share pledging is definitely a healthy sign. At least this is what the history suggests. And tracking promoter share pledging data can be a good starting point to spot turnaround stories.

From The Market Wizards...

"When I trade, I don't just use a price stop, I also use a time stop." - Paul Tudor Jones

Comments on this edition of Profit Hunter:
Post a comment | Read comments

Get Asad Dossani's Best Short Term Investment
Opportunities Delivered Straight To Your Inbox!


Sign Up For Profit Hunter Today... It's Free!
 
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use
 
 
We request your view! Post a comment on "Will Oil Demand Collapse?". Click here!
1 Responses to "Will Oil Demand Collapse?"
Candeth Castello
14 Jul, 2017
The world will reel under climate change situations and will enforce all legislation to stop renewable sources of energy. Therefore fuel like petrol and diesel will give way to cleaner , environmental friendlier fuel. This is the threat to oil in the future.Like 
We request your view! Post a comment on "Will Oil Demand Collapse?". Click here!