The fundamental trends are bullish for oil and energy stocks.
But there’s much more to this story…
The major central banks of the world are ALL stimulating markets at the same time. Europe, China, the US and Japan too.
This is unprecedented.
We have the potential for a massive liquidity-driven market rally over the next 12 months. One that I believe will rival the Quantitative-Easing-fuelled 55% rally the ASX200 saw in 2009/2010.
Capitalize on this trend while you still can.
Right now, many oil stocks are extremely cheap. That won’t last for long. The Energy Index (XEJ) fell 21% last year, but smaller oil stocks fared worse still.
Having knockdown stock prices at the start of a liquidity-driven market rally, along with rising oil prices, is the perfect set-up for you to make huge gains by investing in the right speculative oil stocks.
Why is Oil Rallying Now
Many of the world’s chief oil exporting nations are facing ever-increasing supply risks.
Meanwhile, our oil-addicted global economy craves ever more.
The market is so tight now there is simply no space for mistakes. The slightest blip in production from one of the oil exporting nations, and the oil price soars.
Nigeria is the world’s 7th biggest oil exporter, and Kazakhstan is the 11th. Between the two countries, they export 3.2 million barrels a day. That is far more than the 3rd biggest exporter, Iran, which exported 2.4 million barrels daily. And both Nigeria and Kazakhstan are teetering on the edge of oil supply problems of their own.
Saudi Arabia has also just effectively put a new floor on the oil price by setting a ‘target price’ of $100 per barrel. This means oil is unlikely to fall below this level by much – if at all. This drastically reduces the chances of a fall in the oil price, and therefore removes a fair degree of risk from oil stocks.
There have already been some big developments for the oil market. The International Energy Agency (IEA) forecast that in 2012 the global daily oil demand will increase from 89.1 million barrels, to 89.9 million barrels a day.
The IEA thought global demand would rise even faster, but trimmed its projection on the back of economic growth forecasts. However, it is still a 0.9% increase, the same rate of growth for the last 10 years. The fact is that global demand continues to rise steadily.
This demand is rising at a time when serious trouble is brewing for oil-exporting nations.
The elephant in the room is Iran.
Oil exports from Iran have already fallen. This will leave a gaping hole in the market. Its 2.4 million barrels of oil a day supplied 2.7% of the global market last year. That may not sound like much, but is critical. When Libya’s 1.4% contribution to global production stopped due to civil war last year, the oil price rose 20%.
Iranian exports are falling partly because sanctions on Iran have shut it off from the international banking system. This has immediately crippled its currency, the Iranian Rial. After declining slowly for a few months, the Rial fell off a cliff.
A plummeting currency makes it much harder for Iran to pay for imported goods, including much needed equipment for its oil industry.
Cutting Iran off from the international banking system also makes it harder for the country to receive payments. It is not just oil. Iran is the world’s sixth biggest iron ore exporter. Iron ore traders are completely avoiding the country. They are worried that the trade could go wrong, but are more concerned about the stigma attached to doing business with a pariah state.
The sanctions are causing chaos to the Iranian economy. The levels of Iran’s oil production and exports are falling quickly.
Any falls in Iran’s exports this year will force buyers like Japan and China to look for alternative sources. They will be hard to find. Even if they find them, the market will become even tighter the more Iran’s exports decline.
This problem has come to Europe sooner than planned. Rather than wait for Europe’s rejection, Iran has already announced cuts exports to The Netherlands, Spain, Italy, France, Greece and Portugal. Iranian oil makes up 10-30% of the imports of these European countries.
They are supposed to have 90 days’ worth of spare oil reserves. But beyond that, I have no idea how they make up the shortfall.
I doubt they do either.
Disruptions or falls from major exporters are not the only risks to global oil supply.
There are growing risks to the world’s oil transportation network. If getting oil from the wellhead to your car is riskier, it translates into higher prices.
Here’s an example: 40% of seaborne oil passes through the Strait of Hormuz each day. Blocking the Strait would be the ultimate transportation risk to Middle East oil exports. Based on previous reactions in the oil market to supply disruptions, an oil spike to $200, or possibly even $300, is possible were Iran to block the Strait.
Iran is parading its budding nuclear capabilities. That won’t help the anxious mood on the oil markets. Closure of the Strait of Hormuz is still an extreme (and probably unlikely) scenario. However, another problem – shipping piracy – is already a huge threat to oil transportation and is getting rapidly worse.
Brent Crude Oil Price Breakout – The Start Of A New Rally
The maritime risk company, AKE, reported there was a 170% rise in the hijacking of ships in January.
Some of the worst areas were the South China Sea and the Indian Ocean.
Hijacking off the coast of Nigeria has also become a big issue. Pirates killed a ship’s captain and chief engineer recently, according to a report from the International Maritime Bureau. Attacks in Latin America and Asia involved the armed robbery of the ships in ports.
It is not just dangerous and unreliable oil exporting countries you need to worry about – but also the extra risk and cost in the long trans-oceanic journey getting it to the consumer.
Higher oil prices are the combination of tighter supply, geopolitical risks, and pressure on the transport network that moves oil around the globe.
There are some great oil stocks on the Aussie market, and after last year’s market sell-off, prices are now very cheap.
Dr. Alex Cowie
Editor, Diggers & Drillers
From the Archives…
Gold Shares vs. Gold Futures – Lessons From a Scandal
2012-02-24 – Dan Denning
2012 – The Year Gold Exploration Stocks Explode
2012-02-23 – Dr. Alex Cowie
Why the Australian Economy is Much Weaker than the RBA Thinks
2012-02-22 – Greg Canavan
Aussie Implications From a Greek Default
2012-02-21 – Dan Denning
Opportunities for Government Policy Profiteers
2012-02-20 – Nick Hubble
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Written by Dr. Alex Cowie
Dr Alex Cowie is Money Morning‘s Chief Resources Analyst. (To have his newest investment ideas delivered straight to your inbox you can subscribe to Money Morning for free here).
He is also the editor and chief analyst for Diggers and Drillers — Australia’s premier resource stock advisory service.
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