Are we on the cusp of yet another rise in geo-political risk in the Middle East? It looks that way, and the implications for global markets could be massive. Where will you see it most from an investment perspective? Where you always do; in oil.
If stocks and oil prices do indeed have a strong correlation during ‘risk on’ times, then that is when they tend to move in sync. As markets are now clearly in a risk on mode, oil prices are likely to become more attractive to investors.
A frenzy of drilling in shale gas fields across the country over the past decade has put the US within arm’s reach of achieving energy independence. Gas prices are at record lows, and electricity prices are falling. The US economy is booming right now.
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. And if you’re an investor looking for big opportunities, this could be huge.
From an investment perspective, there are a few ways to play this gas crisis. Australia desperately needs to develop new sources of gas to supply the domestic market. There are a number of small companies developing their reserves now to do this in the years to come.
Australia has some of the largest gas reserves in the world. But due to regulatory failure and a nasty energy bear market during 2014–16, which saw investment in the sector plummet, we’re now in ‘crisis’. How did it get to this point?
Markets make opinions, goes the old saying. Nowhere is that more true than in the oil market right now. More broadly, the rally in oil prices tells you the global economy is healthy. That should keep stocks moving higher in 2017.
Oil was the big winner overnight. Brent crude jumped a massive 3.8% to around US$59 a barrel. 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.
Tech stocks are hot, and no one wants to get off the train right now. While I wouldn’t want to bet against tech stocks here, I wouldn’t want to own them either. There are better value opportunities around with more upside potential. Like energy stocks.
If oil prices go above US$60 and stay there, the flow on effects of higher prices and higher wages increases the rate of inflation. If this effect is large enough the RBA will have to increase rates to keep a lid on inflation.