"Oil Prices Soar from $90 to $130 in a Week"

Has anyone noticed that recently, the international crude oil prices have skyrocketed rapidly? Some investors immediately think this is a good opportunity. Should we hurry to buy some funds linked to crude oil to gain the profits of this period?

01

We rank the funds based on the increase in the past three months and find that the current leading batch of funds are all related to commodities and crude oil. These are obviously mainly invested in crude oil and petroleum, and several commodity index funds are also mainly influenced by the crude oil price, which has quickly increased.

In the past three months, the oil-related funds under Guangfa have risen from a low of 1.21 yuan to over 1.6 yuan. The lowest point was on December 20, 2021, and strictly speaking, it has not been three months yet.

During this period, all other funds have found it difficult to rise as quickly as they have. Because in A-shares or QDII global funds, it is the same, not only the Chinese A-shares are falling, but also the Hong Kong stocks are falling, and European stocks as well as American stocks are also falling. Therefore, the other funds we buy are not as good as commodity funds and crude oil funds.

So from the recent performance of this fund, no matter how you look at it, it is in a very front position among the same category of QDII funds. This is also the reason why many friends are thinking about buying these funds.

02

The reason why this type of fund has been rising so well recently is the rapid increase in international stock prices.

For some time before, the oil price was around 90 US dollars. But in the recent week, especially during the conflict period, the price of crude oil has risen very quickly. Most of the recent five trading days have seen an increase of 2%-3%, so it quickly broke through 100 US dollars, 110 US dollars, and 120 US dollars from 90 US dollars. The crude oil price even reached as high as 130 US dollars at its peak.Not just in the recent period, but actually over the past two years, crude oil prices have been continuously rising.

After that and up until now, nearly two years later, crude oil prices quickly returned to $20 to $30 at the beginning, then there was a fairly long period of gradual increase, and then for a period here, they rose rapidly again.

It is under these circumstances that we have seen the astonishing increase in crude oil prices or oil-related funds in the past three months.

03

After this period of increase, everyone has started to pay attention to investment opportunities in this sector. Many investors have seen from various channels that international investment banks remain very optimistic about crude oil prices and believe they will continue to rise in the coming period.

There are many reasons to continue to be optimistic about rising oil prices.

In the short term, it is believed that the conflict between Ukraine and Russia will continue to cause oil prices to rise.

A more important reason is related to shale oil. Over the past few years, the United States has continuously improved its shale oil extraction technology. The production cost of shale oil has gradually decreased from around $70 to $60 or even below $50.

Even so, this production cost still prevents most American companies mining shale oil from making a profit.

Because, in the past, oil prices were basically below $50, and the time when they were above $70 was very rare. This has also led to many of these American mining enterprises having to stop production.At present, under the existing technology in the United States, recoverable shale oil reserves amount to 58 billion barrels by 2018. The production of shale oil in the United States accounts for 15% of the global crude oil production. Despite this favorable situation, high costs and low oil prices have forced these enterprises to cease operations, causing significant losses for the large financial consortiums and investment banks that have invested in these enterprises.

For these capital forces, there is an inherent demand to push oil prices higher.

The latest news indicates that Warren Buffett has been continuously increasing his holdings in oil-related stocks this year. His investment in Occidental Petroleum has seen a consecutive increase of more than 60 million shares, and this particular stock has risen by 550% from its low in 2020 to the present, with a 45% increase just in the last week alone.

All these signs seem to suggest that crude oil prices will continue to rise, and many fund investors, based on this publicity, believe that even if it's a bit late, they should buy in. This is because there is still an opportunity for crude oil prices to continue to rise in the future.

Is this really the case?

In fact, looking at the recent performance of oil prices, there has been a fear of heights issue.

Although there have been several consecutive days of increases, there have been several days when the intraday gains were relatively large, only to experience a significant drop at the end.

In other words, during this continuous rise in oil prices, whenever there is a day with a relatively large increase, there is a noticeable drop at the end, which is already a clear sign of fear of heights.

Actually, the reasons I just cited for the continued rise in oil prices are not very well-founded. Let's take a look at the issue of production costs first.Indeed, the technical extraction cost for shale oil is indeed around $50-60, but we must recognize that even at its peak proportion in 2018, shale oil accounted for no more than 15%, with the remaining 85% being traditional crude oil.

For this traditional crude oil, their production costs are generally below $30. For some countries in the Middle East, their production costs are even just $20, and it could potentially be lower.

So, what would be the most appropriate selling price for them?

Of course, the higher the better, but this price should not exceed the extraction cost of shale oil; otherwise, it would allow American shale oil production companies to make a profit. The best pricing method is to keep the oil price around $50. At this price point, there is the maximum profit for crude oil extraction in the Middle East, while at the same time, American shale oil has no profit.

Although the price has been rising rapidly recently, if we look back over several years, we find that most of the time it has been within the $40-60 range, and occasionally when it exceeds $60, it quickly drops back down.

In other words, this is the norm. The recent rapid rise is just a short-term overreaction to conflict events.

05

In addition, I don't quite agree with the idea that some international investment banks and financial consortiums, because they have invested in shale oil companies and have a need to make money, are pushing up oil prices.

For these financial consortiums, they have too many ways to make money. With the current oil price already at $120, and yesterday it exceeded $130. For them, it would be more profitable to start shorting the market at this time rather than further pushing up oil prices to make money.

When the oil price continues to fall in the next six months or the next one or two years, they can make more money through leveraged short selling.Making money through finance is often easier than making money through industry, and there is no need to artificially inflate oil prices to make these shale oil-producing companies profitable.