- Money Morning Australia

Why Oil Could be the One Commodity to Defy the Doom…


Written on 10 July 2013 by Dr. Alex Cowie

Why Oil Could be the One Commodity to Defy the Doom…

There’s always some corner of the market that’s making money for investors.

Even in the tough times, when all the ink seems to be in the red, you can still track down a trade with a bit of good old-fashioned detective work.

It may be more challenging than usual in today’s resource sector – but good opportunities still lurk out there.

The first place to start looking is in the energy sector. Even as the small resources index had a horror fall of 63% over the last eighteen months, one of my energy tips, Sundance Energy (SEA), went the other way, letting us lock in a gain of 63%.

But that’s not all. There are plenty more energy opportunities out there too…

Apart from the fact that the world always needs energy, there’s one good reason why energy stocks are doing better than other resource stocks: the price of energy is holding up.

Take the Brent oil price for example. It’s at $107 a barrel today…pretty much exactly where it was two years ago.

Compare that to a commodity index like the Continuous Commodity Index (CCI), which takes in a whole basket of commodities, and is down over 20% in the same timeframe.

The Oil Price – Holding Fairly Steady as Other Commodities Fall


Source: StockCharts

If you look closer at the chart you’ll see the diversion has been very pronounced in the last month.

While oil has shot up 7%, the CCI has fallen 7%.

What’s Going On With Oil?

Well, you can pin most of this on the simmering geopolitical risk in the Middle East.

Egypt has been all over the news as President Morsi was kicked out of the top job. Violent protests have seen scores of people killed. It’s like Groundhog Day as the most populous country in the Arab world spirals into instability again.

The thing is that Egypt is the largest non-OPEC oil producer in Africa and the second largest natural gas producer on the continent. And due to major recent discoveries, natural gas is likely to be the primary growth engine of Egypt’s energy sector.

So the prospect of a drop in production from Egypt due to political chaos is one factor keeping oil prices strong.

But it doesn’t stop there. The Suez Canal and Sumed Pipeline, which both travel through Egypt, are strategic routes for Persian Gulf oil shipments to Europe. Closure of the Suez Canal and Sumed Pipeline would add an estimated 6,000 miles of transit around the continent of Africa.

So when protests broke out right next to the Suez Canal a few days ago, oil prices took another leg up.

Egypt isn’t the only hot spot either. Protests in Libya have shut down several fields there. A pipeline from Iraq to Turkey has mysteriously sprung a leak. And Syria is still a basket case: its oil production keeps falling and has now halved in the last few years.

This tongue-in-cheek ‘map of the world according to investors’ went round the office this morning, simply describing the Middle East as ‘Oil, Drama’! A bit of a simplification maybe, but right now it’s about right…

Middle East: ‘Oil, Drama’


Source: TRB

A bit of fun there, but I wouldn’t laugh too hard. Its summary of Australia as ‘China Echo Bubble’ might not be too far off the mark either!

The ‘drama’ in the Middle East isn’t the only determinant of the oil price of course. With US data going through a better phase for now, the prospect of the world’s biggest oil importer wanting to import more oil has also given the price a kicker in recent weeks.

As well as all this, the simple fact is that it costs more to produce oil today than it used to. There is a natural floor to the price at around $85 / barrel by some estimates.

When oil plunged twelve months ago, it didn’t stay close to that price for long. A price close to production costs would have triggered a drop in production, leading in turn to higher prices.

The reasons being that it’s more expensive to drill oil today as the easy stuff is already gone, and oil companies have to go to ever more inventive and expensive measures to get harder-to-access reservoirs.

We take it for granted, but imagine how hard it would be to drill offshore through five kms of rock from a platform floating a few kms above the ocean floor.

Or how about the costs incurred by the relatively new technique of fracking, which is revolutionising the industry? The infrastructure that goes into ‘fracking’ a well is astonishing.

There is also increasing discussion about the shelf-life of a frack well. It looks increasingly like they expire more rapidly than conventional wells. Because of this, more are needed to sustain flow, and this increases costs further.

Anyway, the point is that thanks to ‘Drama’, stronger demand, and higher production costs, you could expect oil prices to stay stronger than most commodities.

And I’m not overlooking natural gas either, which is a whole other story. Over the last few years it had doubled to break through $4 a few months ago.

So with natural gas doubling, and oil holding its ground, you could do worse than look at energy plays in today’s resource market.

This doesn’t mean that all energy stocks will do well…far from it. ASX-listed energy stocks vary from the great and the good, to the sublime and the ridiculous. Serious homework is required, and a healthy dose of risk appetite is needed on top of that.

But…get it right with energy stocks…and triple digit percentage gains are a realistic prospect.

Dr Alex Cowie+
Editor, Diggers & Drillers

From the Port Phillip Publishing Library

Special Report: Panic of 2013

Daily Reckoning: The Lucrative Spot for Investors to Look… The Energy Sector

Money Morning: Gold Breaks A Record

Pursuit of Happiness: Make Sure You’re Not a Property Investing ‘Loser’

[Ed note: Continuing for the rest of this week, we'll publish some of the best recent articles from the guys over at our sibling free e-letter, The Daily Reckoning. As mentioned yesterday, they take a different view on the market.

The Daily Reckoning editors look at the big picture view of the economy and analyse the impact of central bank monetary policy on the value of assets and money. As they see it, these policies have resulted in an almighty asset bubble which will lead to a devastating crash. You've read our view; now it's time to consider the other side. Following is an essay from Greg Canavan, first printed in The Daily Reckoning on 19 June 2013...]



Already a subscriber to Money Morning... or simply, just like what you're reading? Then show your support and spread the word...
Share this post on...
Share

Leave a Comment

Letters will be edited for clarity, punctuation, spelling and length. Abusive or off-topic comments will not be posted. We will not post all comments.

If you would prefer to email the editor, you can do so by sending an email to moneymorning@moneymorning.com.au




FREE INVESTMENT REPORT: The Top 5 Oversold Blue-Chip Stocks in Australia


These five Aussie stocks all have something very powerful in common…and it could see them bounce up in the coming weeks and months. For all the details download this report right now.

PLUS you'll get Money Morning every weekday...absolutely free.

Enter your email address below and hit the 'Claim My Free Report' button now.

Privacy Statement
We will collect and handle your personal information in accordance with our Privacy Policy.
You can cancel your subscription at any time

New Frontier Investor

The last investment megatrend birthed stock gains of 11,095%, 20,621% and 50,760% over 20 to 40 years.

If Kris Sayce is right, gains from this next megatrend won’t just reach those heights...

They’ll SURPASS them...

To see why, click here.

Iron ore leadgen

  • ^NDX3986.192+24.569 - +0.62%
  • ^FTSE6798.15+2.81 - +0.04%
  • ^AORD5578.800+11.800 - +0.21%
  • ^AXJO5588.800+12.100 - +0.22%
  • AUDUSD=X0.9444
  • USDJPY=X101.5405

PAN [predict literally ban]

interest rates leadgen

Australian Small-Cap Investigator

Why Holden’s future lies
beneath the soil in
Tasmania…

 
And not just the future of Holden…but Toyota,
Hyundai and Mazda too


CLICK HERE FOR THE FULL STORY

investing success leadgen

TDR [war in the pacific ban]

Resource Sector leadgen

Gowdie Family Wealth

Which type of family are you?


  1. The kind that ends up in court
    battling over inheritance money…

  2. Or the kind that knows how to
    protect, pass on and grow wealth forever.

Click here if you want the kind of family
that grows its wealth for generations.

The Money For Life Letter

A giant wrecking ball is about to smash Australia’s retirement system to smithereens...
 
And unless you take the evasive action outlined in this Special Issue, everything you’ve saved and invested over your whole working life could soon be GROUND to DUST.
 
Click here to read.

Gold Stock leadgen

Revolutionary Tech Investor [BANNER moonshot]

Graphic Ad 1 – Blue Chip Stocks Report


More Recommended Reading Below...

The Pursuit of Happiness & The Daily Reckoning

  • The Pursuit of Happiness
  • The Daily Reckoning Australia

Russia and its supporters have nothing to gain from attacking civilians. Russia and Putin were winni [Read More...]

You owe it to yourself take this advice. But even if I’m right and you act now, you may not be able [Read More...]

New Zealand may not be an emerging market, but it’s highly leveraged to growth in emerging markets. [Read More...]

Clearly, illegal immigrants are a headache for the government. But rather than store them on Christm [Read More...]

Don’t fear the swan. But don’t be complacent either. Acknowledge and respect that black swan events [Read More...]

Give the guy a break. Vladimir Putin is not the worst. Compared to the US, Russia has been remarkabl [Read More...]

Once your perception of inflation changes, your behaviour changes, too. Then inflation becomes a psy [Read More...]

You’ll know we've been profiling our new project, the Albert Park Investors Guild. Today we’d l [Read More...]

The world is a safe, stable place. Must be. Janet Yellen says so. The bond market says so. The stock [Read More...]

Into this swirling maelstrom of confusion, you’ll be invited to board a new investment vehicle next [Read More...]

TESTIMONIALS

"I think you're fantastic! I love to read what you write...you're so interesting and amusing and I've learned so much" -
Money Morning reader, Chris Gadd

"You guys are brilliant. I feel more relaxed about the future than ever simply because I know what is going on rather than floundering around with smoke screens and mirrors from the government and mainstream" -
Money Morning reader, Helen Carter

"Wow what can I say? I was an economically confused moron until I read your newsletter and even though I've been a subscriber for a short period I can now see how easy it is to understand, if you use common sense and can have the spin translated into everyday language. Thanks for an entertaining read." -
Money Morning reader, John

"Keep up the good independent and well thought out articles offering a view that often debunks mainstream myths." -
Money Morning reader, Craig

"I do admire your straight talking and simple analysis of the situation, I think of you as the Jeremy Clarkson of finance." -
Money Morning reader, Jeffery