Oil Price at 71 USD and a Repayment of 68 billion (11 June 2009)

Two things I will be talking about. Firstly, oil prices rose to 71 USD per barrel on Wednesday. This was the first time it was touched above 70 USD in seven months. The two reasons cited was that oil demand may have bottomed out and there was a larger than expected fall in crude oil stocks.

This further supports the growing signs that the global economy has bottomed out. It also means that as the whole world starts to rev up their economies again, demand for oil will rebound. Most importantly, China will try and move even faster to buy up more energy companies and secure more energy resources.

The memories of oil at 150 USD per barrel are still fresh in China’s mind and they would not want their continued economic growth, which is so vital, to be derailed by high oil prices again. China will stock up, and it will do so very aggressively as oil trends higher. I have a relatively small position in a Russia equity fund, which is essentially an oil play. Looking for it to continue moving upwards.

The other thing to mention would be that in US, ten of their largest banks will be allowed to return 68 billion in TARP money which was lent to them by the Federal Reserve. It reflects a major turn around in the US financial sector because the Federal Reserve would not have allowed these banks to return that money if they felt that they were not healthy enough yet.

Bank lending to companies are the life blood of the economy. To have enough confidence to return billions of dollars lent from the government also reflects that the credit squeeze has loosened considerably. Even banks that the US government ordered to raise more capital, have generally had no problems raising billions more dollars to meet those capital requirements. Greater confidence in banks filters down to greater confidence in lending to companies as well. (I am holding on to my Asian financial sector fund with confidence of a rebound in financial sector earnings.)

Even in the local stock markets, you see more rights issues and share placements for additional capital from companies. But instead of seeing a massive stock price drop (even the mere rumor of such capital raising 3 months ago would have resulted in the stock plunging.), we now see the stock prices remaining steady, or even rising in some cases.

Companies are finding it easier to raise money. Once their immediate survival is not in question, they will focus on profitability, the stronger ones will then focus on expanding their market share.  We will still see weaker companies die off, as they should. But the stronger ones will rise to take their place, and rise to newer heights. Thus, I am confident of a rebound in the global economy, and hence stock markets.
Some of the individual players (companies) may change, but the new and old companies which are the strongest survivors from this time round’s financial crisis will be the ones that will dominate the coming decade.