What’s an investor to do when you have two megalomaniacs facing off against each other?
It’s a good question, and one that I don’t have an answer to.
This is a classic edge of the bell curve scenario. The probability of something going wrong is low, but if it does, it will have a very big impact.
Last week, President Trump, in his first speech to the United Nations, threatened to ‘totally destroy’ North Korea. Not exactly a move from Neville Chamberlain’s playbook.
Then, overnight, North Korea accused Trump of a declaration of war, and threatened to shoot down any US planes in or around North Korean airspace. Kim Jong-un also took the opportunity to call Trump a ‘mentally deranged US dotard’. Nice.
Seriously, can you believe these two bozos are having a global slanging match, and freaking every sane person out on the process? It’s like a narcissist heavyweight championship of the world.
Hopefully, their love of self and the power they have will see them continue to bristle and bark, but not do much else.
While US markets aren’t too concerned right now (they’re still at or around all-time highs) that could change if these two keep it up.
Or it could be just an excuse to take some profits off the table, especially in the stretched technology space. The NASDAQ fell 1.2% in last night’s US trading session.
Oil was the big winner overnight. Brent crude jumped a massive 3.8% to around US$59 a barrel, while West Texas Intermediate, the US benchmark price, was up a strong 2.8% to US$52 a barrel.
As you can see in the chart below, it was a breakout move for Brent crude, which is now trading at the highest price in more than two years.
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Yet all I’ve heard over the past two months are bearish stories about the global oil glut and the unlimited production ability of US shale oil. That’s why I’ve been bullish on oil for sometime.
I highlighted this in a special report last month. In it, I explained why oil prices were headed higher and why the Saudis wouldn’t be selling off a portion of their state owned oil company (the largest IPO in history) in an oil bear market.
That view appears to be playing out, although it’s still early days. Oil has had a big run over the past month or so. No doubt profit taking will see prices pull back in the weeks to come.
Although sentiment is clearly turning, as this excerpt from Bloomberg makes clear:
‘Those in the oil market fearing a flood of OPEC supply next year will probably be better off preparing for a shortage, according to Citigroup Inc.
‘Five countries in the group — Libya, Nigeria, Venezuela, Iran and Iraq — may already be pumping at their maximum capacity this year, Ed Morse, the bank’s global head of commodities, said in an interview. Rather than a surge in output, there’s a risk of a market squeeze emerging as early as 2018, driven by those nations because of weaker investment in exploration and development, he said.
‘“Fear in the market has been that OPEC production will rise dramatically,” said Morse. However, “there could be a supply gap emerging, which could point to a tighter market,” he said in Singapore on the sidelines of the S&P Global Platts APPEC Conference.’
From a global supply glut to a supply gap, just like that?
Well, that’s overstating things. But the key here is to understand that markets operate on easily digested narratives. The oil market narrative for years has been that oil is plentiful, and that any rise in price would be met with a wall of fresh supply from US shale oil.
But as I explain in this special report, US shale producers need higher prices to maintain production.
Now, the narrative is slowly changing. It might not be shifting to a ‘supply gap’ anytime soon, but an end to the ‘supply glut’ narrative would be enough to push prices higher.
The stealth bull market in oil continues…
Editor, Crisis & Opportunity