You can’t say you’re not getting your money’s worth lately. I pegged three markets to back in a report we released at the start of the year.
The first two were Aussie and US stocks. They’ve both had a decent lift. But the third has smashed it out of the park so far: Crude oil.
It’s now gone up for six weeks in a row. The ‘West Texas’ benchmark is up 40% from the low it hit in late December.
Now we’re really seeing some of this positive vibe show up on the stock market. No example can better the one we saw last week…
Big energy stock Chevron came out with an agreement to buy a US energy independent called Anadarko Petroleum.
Chevron is paying a 33% premium to acquire Anadarko. It’s a monster US$33 billion deal.
Anadarko has significant acreage in what’s called ‘onshore’ USA. Think Texas and New Mexico. Naturally, a deal of this magnitude has lifted similar stocks. Three other US independents all rallied more than 8% last Friday.
More deals are likely too. Many of the smaller US energy firms are starved for capital and could potentially reduce costs through mergers.
Don’t dismiss this because it’s not happening in Australia. There are several companies listed on the ASX that operate in America.
We might see some of these swallowed up in time too…or at least rally for similar reasons.
Buy ’em when they’re cheap and hated
The economic case is not hard to make for many of them. Energy stocks, both here in Australia and elsewhere, have not rallied with the same strength as the benchmark crude oil contracts. That could make them appear cheap, to some eyes at least.
I noticed last week that two investment funds increased their holdings in two of these ASX oil stocks recently. I can see that because they’re forced to show the increase via regulatory filings.
I don’t expect oil or the market interest in the related stocks to settle down anytime soon, either. Here’s one reason why.
The head of Libya’s national oil company gave an interview to the Financial Times last week.
He warned that the threat to oil production was the gravest it had had been since the civil war of 2011. He warned that the fighting could even be worse.
Such an outcome could potentially take 1.2 million barrels of oil a day off the market. That’s something we can ill afford to lose. Venezuela and Iran are also down and OPEC is deliberately cutting production.
Naturally, a rising oil price is showing up in higher prices for petroleum products. It’s possible that US ‘gas’ prices go over US$3 a gallon for the North American summer. That’s back around the 2018 high.
The market seems to be betting on that outcome. Gasoline traded on the NYMEX was the highest returning market for the week, according to The Wall Street Journal.
How long before Donald Trump tweets about this? I don’t know. But there’s no doubt that a strong oil price is a political headache in more than one country.
A higher oil price: More costs for some and profit for others
Brazilian President Jair Bolsonaro has just come out and cancelled a planned rise in the price of diesel.
Brazilian truckers went on strike last year over the cost of fuel. Politicians everywhere got a reprieve when oil took a swan five in October last year. 2019 might not prove so cooperative.
It’s always prudent to keep an eye on what the so-called ‘smart’ money is doing too. I found it interesting that US buyout giant Carlyle Group just put US$3.6 billion into Spanish oil and gas company Cepsa. Carlyle now owns 30%, with an option to go as high as 40%.
Cepsa both produces oil and gas and has refining operations. I wonder if Carlyle has its eye on the IMO 2020 environmental regulations due to come into effect in January.
I’ve spoken about this before. Point for today: This has the potential to give refiners very large margins for ‘middle distillates’ like diesel.
If they’re earning high margins, they won’t mind bidding up crude oil. You might be surprised to hear that two types of Australian oil are selling at premium to the global Brent price, according to Reuters, thanks to IM0 2020.
BHP Group [ASX:BHP] and Santos [ASX:STO] catch a tailwind from this, according to the reporter, because they have access to these West Australian blends. That might make Carnarvon Petroleum [ASX:CVN] worth keeping an eye on too. It made a big discovery in offshore WA last year.
I expect a lot more action around this market as the year goes on. The time to be building your exposure is now.
PS: Do make sure you see this presentation from my colleague Shae Russell. If Shae says it’s urgent, it’s worth finding out why.