Keep a close eye on oil markets this week…
Or at least make sure you’ve topped up your petrol tank.
Because, as you’ve probably read by now, a drone strike (or rather 10 drones) just hit Saudi Arabia’s biggest oil installation late last week.
It’s knocked out 50% of Saudi Arabia’s total oil supply, which is 5% of the entire global oil market. A huge amount of oil.
To put it in context, it’s almost the entire output of the entire US shale oil boom from 2008 to 2018.
Anyway, we’ll see how the oil price reacts today…
Some analysts are expecting a rise of around US$10 per barrel.
Kevin Book, Head of Research at Clearview Energy, put out a note that said:
‘Our baseline assumptions, which incorporate public assessments of strategic petroleum reserve capacity and OPEC spare capacity, imply a net shortfall of ~1 MM bbl/d, or at least a ~$6/bbl premium to the ~$60 Brent close. Exclusive of this supply offset, and assuming a three-week shutdown, our models imply ~$10/bbl of upside.’
Mind you, this is just the immediate reaction. It could get a lot worse.
As Liam Denning at Bloomberg wrote yesterday:
‘What is clear is that the oil market has entered a new and dangerous period. Crown Prince Mohammed bin Salman, who spearheaded Saudi Arabia’s intervention in Yemen, will almost certainly have to respond, especially if the attack really has knocked out a lot of oil supply for an extended period. In that case, he is also watching his IPO plans for Saudi Arabian Oil Co., or Saudi Aramco, literally go up in smoke.’
It’s a highly volatile situation.
And longer-term prices could go a lot higher…
US$200 oil back on?
Last week the famous oil man T Boone Pickens died.
Coincidentally, I talked about him in a recent Money Morning update and his peak oil theory of the early 2000s. At the time he was predicting over US$200 per barrel. Pickens turned out to be wrong back then.
But could his $200 target be back on the table now?
To be clear, no one expects this. But there are certainly a number of bullish signs pointing to rising prices…
Notwithstanding the immediate hit to Saudi supply, there’s the fact the US are pinning the blame for the attack on Iran.
A ratcheting up of political tensions in the Middle East could have dramatic effects on the oil price.
It might mean more sanctions on the export of Iranian oil at the very least.
And if that happened, you’d have an even bigger supply shock to oil over the medium term.
Though how effective such sanctions would be is uncertain. If oil prices rise far enough, Iran would no doubt find eager buyers on the black market for its discounted crude.
On the demand side the clear driver is the China–US trade war.
There are signs of a thaw in tensions here, with China last week buying 10 shipments of US soybeans. It’s seen as an effort to build up confidence before crucial October trade talks.
Interestingly, Politico reports that the Trump team is trying to find an ‘escape hatch’ to get out of the trade war, which is starting to hurt Trump in the polls.
I’ve always maintained that Trump would do a deal with China — proclaiming it the ‘best deal ever’ no doubt — in time for his re-election campaign in 2020.
The only thing up in the air is the timing.
Either way, any resolution of the US–China situation will increase demand for oil as the wheels of trade grind back up a gear. Again, this is a positive for oil prices.
If it plays out like this it could give a boost to some of Australia’s oil and gas stocks.
Companies like Woodside Petroleum Ltd [ASX:WPL], Buru Energy Ltd [ASX:BRU] and Karoon Energy Ltd [ASX:KAR] are three interesting ways for you to consider getting some exposure here.
All of Australia’s oil and gas companies have the simple, natural advantage that they’re not in the Middle East.
The political risk is a lot lower. And this latest drama in Saudi Arabia might have some oil investors looking to Australia for a safer source of long-term supply.
But oil isn’t our most valuable resource in this unstable political world right now.
That’s something else…
Our most important commodity right now
No, it’s not oil. Or iron ore even.
It’s something more basic.
We are a relatively open, democratic, free trading society. This makes us an attractive place to invest and do business in.
Our trading partners, like China, trust us to trade and our strategic partners, like the US, trust us to back them up in the world.
In an increasingly unstable world, being a trusted supplier of key mining commodities is becoming more and more important.
Security of supply, whether it’s in oil, gas or key metals is paramount.
My friends here at Money Morning, Sam Volkering and Ryan Clarkson-Ledward, think they’ve uncovered an investment opportunity in one particular commodity.
An opportunity that’s only come about because of the uncertain political times we are in. It’s in a component crucial to both the US and China.
And Australia holds the ace card when it comes to its future production.
Anyway, you should read what they have to say about it here. It’s a fascinating topic and one that could end up being immensely profitable too.
Editor, Money Morning
PS: Watch These 10 Aussie Mining Stocks Go NUTS in 2019 (No.8 Is A Ripper!). Download now.