Could Oil Be Set for a Sudden Surge?

There are growing signs you could be about to see a surge in oil prices.

The indications are just a few noises here and there.

Rumblings beneath the surface, mainly…

But enough to make you sit up and pay attention.

Take a look at the chart:

Oil gains this month 11-10-17
Source: Bloomberg
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In September oil posted its biggest quarterly gain in more than a year.

The key drivers were forecasts for rising demand. And tensions between Turkey and the newly declared independent region of Kurdistan. Tensions that could hit supply.

More on this shortly.

But first, why should you care?

Because the price of oil has an effect on all aspects of the economy. From currencies to shares, to business profits. As well as the price you pay for fuel at the pump.

It’s probably the single most important commodity to watch.

Especially in resource rich countries like Australia.

And if you’re an investor looking for big opportunities, this could be huge.

You see, any move above US$60 would take the market by surprise. And result in big short-term gains for contrarian investors who get in the right investments now.

So, can it happen?

Let’s take a look at the evidence…

An emerging story for oil

Oil prices remain near decade lows.

They closed yesterday at US$49.56. Only in the worst three months of the GFC in 2008 did oil prices close the month lower than this.

The surprising thing is that the global economy is ticking along fine. Usually this would support oil prices.

But when you break it down, you can see where the problem lies for oil.

Take a look at this chart:

Composite index 11-10-17
Source: Financial Times
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The blue line shows that economic growth in the advanced economies has been OK. But in emerging economies it fell off a cliff in 2015.

As conditions in these economies fell, supply from alternative oil producers such as US shale oil increased.

Basic economics 101 tells you what happens when supply increases while demand decreases, prices fall.

And it’s a reversal of this dynamic that could result in a coming surge.

First let’s look at what’s happening to demand. 

As the chart above also shows, emerging economy growth rates have come back with a vengeance.

The composite Tiger index is at its highest level since 2012.

This indicates that economic growth across the world is significantly stronger than it has been at any time in those five years.

At the same time, confidence remains strong in advanced economies.

The US picked up after President Donald Trump’s election victory late last year. At the same time, confidence has improved in the resurgent Eurozone this year.

A sharp recovery in commodity exporters has enabled the emerging economies index of real economic data to improve towards recent highs.

High stock markets have also helped financial conditions remain supportive of growth in the global economy.

This is sometimes called the ‘wealth effect.’ A process by which higher asset prices make people feel wealthier and spend more, resulting in improved economic growth.

And just today I read in Bloomberg:

Saudi Arabia’s state-owned oil giant has “mega investment” plans for the world’s fastest growing oil market, according to Saudi Arabian Oil Co.’s chief executive officer.

This is actually very interesting. It’s something my colleague Greg Canavan noticed a few months ago. Long before there were any signs of an oil price resurgence.

You see, the Saudi state-owned oil company, Aramco, is planning the world’s biggest ever IPO in 2018.

It’s in effort to diversify their economy away from oil.

And what will help increase the value of their IPO? You guessed it — higher oil prices.

Anyway, I strongly suggest you read Greg’s research in full here. Three of the stocks he recommended are already moving higher, but he thinks they could move a lot higher still as the story plays out.

The second factor in the oil price surge story is supply.

There were signs the persistent crude surplus was finally starting to shrink.

In the US shale oil investment has dropped off as lower prices have curtailed the appetite for expansion.

And Citigroup just put out a note saying they expect a possible supply shortage, driven by OPEC already pumping at full capacity but not investing much in future production.

Then there was Turkey threatening to cut off oil exports from the autonomous Kurdish region of northern Iraq.

The Kurds — historical enemies of the Turks — just declared independence. And oil is their main export.

Take your positions

Oil is no ordinary commodity.

It’s a political tool. In a manipulated market. Which means you have to read the economics of it differently than normal.

Ask yourself this.

In whose interests are higher, or lower, oil prices?

Good investing,

Ryan Dinse,
Editor, Money Morning

Ryan Dinse is an Editor at Money Morning.

He has worked in finance and investing for the past two decades as a financial planner, senior credit analyst, equity trader and fintech entrepreneur.

With an academic background in economics, he believes that the key to making good investments is investing appropriately at each stage of the economic cycle.

Different market conditions provide different opportunities. Ryan combines fundamental, technical and economic analysis with the goal of making sure you are in the right investments at the right time.

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