While the Dow Jones index fell 76 points on Friday, or around 0.35%, oil had its best day in months.
Brent crude, the international benchmark, surged 3.3% to US$52.72 a barrel.
Media reports suggest the sharp move higher was due to short covering. That is, traders betting on lower prices got spooked and had to ‘cover’ their positions by buying, pushing up process in the process.
This explanation makes sense. US crude oil stockpiles dropped for a seventh straight week last week, much more than expected. It caught traders off guard.
However, in my view it’s the brewing crisis in Venezuela that is unnerving the oil market right now. The political situation in the country is disintegrating as President Nicolas Maduro tries to concentrate his power.
As a result, US President Trump has threatened sanctions. The US is the largest importer of Venezuelan oil. It heads straight to the refineries on the Gulf Coast of the US. If that source is cut off, the oil will have to come from somewhere else.
Hence the sharp rise on Friday as traders start to increasingly price this scenario in.
While this is certainly a short term risk for the oil market, it’s not a reason to be bullish longer term. Sanctions rarely change the longer term structure of a market.
Behind the Scenes
But there are plenty of other reasons to like oil as a longer term investment. In fact, I think we’re close to an inflection point for the oil market. There is a lot going on behind the scenes right now that you’re just not hearing about.
It concerns Saudi Arabia and the United States, and a major event set to take place in 2018. I reveal everything in a special research report due for publication tomorrow, so keep your eye out for that.
In the meantime, here’s another reason to think about getting some energy in your portfolio, while everyone else is focused on Amazon, or lithium or cobalt.
Writing in Forbes last month, energy historian Ellen Wald argues that higher prices are on the way:
‘This might come as a surprise after two and a half years of low oil prices, but the global economy may be in for a major shortage of oil in the coming years. This could mean severe hikes in prices on crude oil, gasoline, transportation, plastics and even food. It could also mean a shift in power back to the world’s best-positioned oil producers, such as Saudi Aramco and its Persian Gulf partners in OPEC. Overall, the dawn of a shortage in oil could shock world economies, and it would be entirely man-made — made by investors.’
Wald goes on to argue that thanks to the low oil price environment of the past few years, executives are running oil companies with too much focus on short term profits. And ‘activist investors’ are to blame.
That is, some investors who take large positions in oil stocks put pressure on management to cut costs…which means cutting back on capital investment. Lower capital investment means less exploration and development, and, eventually, lower supply.
‘Fatih Birol, the executive director of the IEA, recently warned that global investment by the energy industry is still declining. “The key finding is that (the) global energy industry spent last year 12% less than the previous year,” which he called, “a big decline.” From the perspective of energy consuming nations, Birol said, “To avoid major supply disruption problems by the 2020s, we need a miracle.”’
The ‘miracle’ that many expect is renewable energy and battery storage technology. But it might be too much of a stretch to think these will be an economic solution anytime soon.
‘For those who think electric vehicles will make up for a lack of oil resources — it is too much to ask an unproven technology to meet such a major economic need so soon. Even countries such as the UK, that claim to be mandating the adoption of electric vehicles, are looking 20+ years down the road. No one knows when battery technology will be able to accommodate the kind of long distance driving that is common in the United States. For those who wish to rely on existing shale finds, the amount of oil and the cost of its production has not shown the ability to compensate. It would be a major gamble for the world economy to bet that we do not need more oil finds in the decades to come.’
Granted, this is only the opinion of one person. And it’s certainly not the opinion of the market in general. Thanks to the US shale industry, oil supplies are plentiful right now. And oil traders are only interested in the ‘right now’. Rarely do they look 12 months ahead.
But if you’ve got the foresight to do just that, there may be a big profit opportunity brewing.
As I said, keep an eye out for my special report on the topic, tomorrow. In it, I make some big calls. Which is unusual for me. Normally I keep my head down. But as you’ll see, the risk versus the reward on this opportunity is just too good to pass up.
That’s why I want to tell you about it now, before the market starts to move. And who knows, maybe the 3% plus surge on Friday is the beginning of the inflection point for oil?
Editor, Crisis & Opportunity