Oil predicts a surprise profit pop up
May 16th, 2020
Oil
You might have noticed last week was a great week for oil. European Brent is $32 & the US WTI is $29. In April WTI was negative! This is a sign of recovering economic activity. But it’s not only oil doing well, the Rupiab is at 14,900. This relationship between the Rp & oil shows us higher profits are coming.
Cost
First, we need to establish that oil is the basic cost of everything. Farming for food requires energy from fertilizer which comes from oil. Making any materials requires oil. Even making ‘renewable’ energy requires oil to make the parts & as a back up when the wind stops. Transport requires oil too. For any business, oil is the basic cost.
You might have noticed last week was a great week for oil. European Brent is $32 & the US WTI is $29. In April WTI was negative! This is a sign of recovering economic activity. But it’s not only oil doing well, the Rupiab is at 14,900. This relationship between the Rp & oil shows us higher profits are coming.
Cost
First, we need to establish that oil is the basic cost of everything. Farming for food requires energy from fertilizer which comes from oil. Making any materials requires oil. Even making ‘renewable’ energy requires oil to make the parts & as a back up when the wind stops. Transport requires oil too. For any business, oil is the basic cost.
Oil in rupiah is getting cheaper, profits & growth will surge
Rupiah
When the price of oil goes up, it’s more expensive to do business & you either have to raise prices & get less business or lose margin. Either way it puts pressure on profits. For us in Indonesia, the key is the Rupiah price of oil. In 1996 it cost Rp48,000 for a barrel. By 2014 the cost was Rp1.3m!
10
That’s 27x! Yes prices & salaries adjusted to pay for it, but that took time & every time the rupiah fell we had to catch up. But something different has been happening since 2014. This ratio has been improving. In this current crisis, the price of oil in rupiah has halved, & the total increase is now only at 10x.
Profit
While oil has increased & will continue to increase, this time our selling prices in Indonesia are relatively higher. The ratio of sales to costs expanding means better cash flow & better profits are ahead. With better profitability, we can expect faster economic growth & much faster growth for the stock market which trades based on cash flow & profits.
When the price of oil goes up, it’s more expensive to do business & you either have to raise prices & get less business or lose margin. Either way it puts pressure on profits. For us in Indonesia, the key is the Rupiah price of oil. In 1996 it cost Rp48,000 for a barrel. By 2014 the cost was Rp1.3m!
10
That’s 27x! Yes prices & salaries adjusted to pay for it, but that took time & every time the rupiah fell we had to catch up. But something different has been happening since 2014. This ratio has been improving. In this current crisis, the price of oil in rupiah has halved, & the total increase is now only at 10x.
Profit
While oil has increased & will continue to increase, this time our selling prices in Indonesia are relatively higher. The ratio of sales to costs expanding means better cash flow & better profits are ahead. With better profitability, we can expect faster economic growth & much faster growth for the stock market which trades based on cash flow & profits.
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