Is There Life After Oil?

Everyone is talking about oil prices right now. They have indeed fallen sharply. This reflects the current state of supply and demand: when supply substantially exceeds demand, prices inevitably drop. That is the law of the market, and there is nothing surprising about it. Oil consumption depends directly on business activity, and the main consumers of oil products are simply not consuming. Planes are not flying, so there is no demand for kerosene and lubricants. Cities are under quarantine, so gasoline consumption has fallen sharply, because drivers are staying at home.

Stopping oil production is not so easy. Mothballing a field costs money, and bringing it back into operation costs money too. Everyone understands that the pandemic will end and oil consumption will recover, so every field owner faces a dilemma: operate at a loss and wait for demand to recover, or shut down. In this situation, most owners will probably wait for demand to recover, which means that output will go into storage. Storage capacity is also limited, and production will only start to fall once all the storage facilities are full. That may take a couple of months. The most striking thing is that price currently has no effect on demand. Even if oil products were free, consumption would not rise. So for now, we simply have to wait for the pandemic to end and for demand to recover.

Gold and uranium, by contrast, are rising in price, and Kazakhstan produces both in substantial quantities. Gold has risen from $1,500 to $1,700 per ounce, and uranium from $24 to $32 per pound. Gold is rising as a safe-haven asset, and there is nothing more to explain there. The rise in uranium, however, is driven precisely by the decline in uranium production amid COVID-19.

A number of major uranium producers have halted mining as a quarantine measure. Consumers of uranium products, however, cannot halt consumption, because shutting down a nuclear power plant is not easy. Demand will therefore exceed supply, and this is reflected in the price of uranium. Kazakhstan is the world's largest uranium producer, so this sector will be doing well in the near term.

It will be interesting to watch wheat this year. Demand for wheat will not fall even during a pandemic, because it is a staple with steady demand that does not depend on pandemics or other cataclysms. Its price has always been determined solely by the volume of supply. Lower fuel prices and the depreciation of the tenge make this sector attractive for us. Compared with other sectors, farmers will look quite good this year.

As a friend of mine says, when a caravan turns around, the camel that was walking last becomes the first.