The Biggest Beneficiary of the Oil Price Crash is…

Oil production and the pipe
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Resource stocks continued their despair yesterday as the current rout sent more commodity names into 52 week low territory. In fact, I’m not sure how long it’s been since I’ve seen that many names on the list. The Grinch is getting his hands on a few Christmas bonuses this year, that’s for sure.

BHP [ASX: BHP], for one, broke to $28.88 and is now trading at a five year low. Santos [ASX: STO] is in all sorts of trouble. It’s now lost $7.5 billion in value in three months.

Be wary of energy companies unless you have a very compelling chart to trade,’we wrote in Cycles, Trends and Forecasts back in October. The issue went through the implications of an oil market downturn and compared today’s events to what happened thirty years ago. The similarities are quite striking. How so?

In September 1985, with the oil price under pressure as it is now, the Saudi Arabians decided to increase their market share. To do this, they broke their OPEC agreement to maintain a fixed quota to support the oil price. The Saudis ramped up production and flooded the world with oil. The price was cut in half.

Daniel Yergin, in his classic book, The Prize: the Epic Quest for Oil, Money & Power, compared this move in the 1980s to the days of US oil baron JD Rockefeller giving his competitors a ‘good sweating’ to see who could survive the low prices. As you can see right now, the sweating is on.

Looking at the Santos chart, you can see just how brutal the drop has been.

Santos: An ugly drop


Source: STEX

 

The chart is also a handy lesson in risk management. Have a stop loss in place and make sure you stick to it.

It’s also interesting to note some of the news in the press recently. Just last weekend in The Australian Financial Review a headline ran: ‘Rio ready for surge in aluminium’. And last month, BHP was talking up the prospects of its copper business in the Wall Street Journal.

It’s a given they’ll put the bullish word out. The charts said otherwise. And that’s important. I just finished a book by Ugo Bardi called Extracted: How the Quest for Mineral Wealth is Plundering the Planet. Talking about copper, he gives the long term outlook as one of lower reserves, higher extraction costs and a dwindling discovery rates.

Ugo suggests global production could peak in 2023. For an industrial metal as important as copper, that’s big. And all things being equal, that should mean higher prices.

Except that isn’t happening. Copper has been trending down since 2011. In the long term, Bardi’s points may be valid. But the chart tells me not to get bullish on copper anytime soon. You won’t tie up your capital in the wrong market at the wrong time.

Of course, copper’s day might come again thanks to a clear winner from lower oil prices: India!

India is the world’s third largest importer of crude oil. Back in October, The Business Standard quoted economist Madan Sabanavis saying, ‘With every $10-a-barrel fall in crude oil prices, the country’s annual oil import bill will come down by $16-17 billion.’

Don’t forget it wasn’t so long ago the Indian government raised taxes on gold imports to bring the country’s current account deficit under control and help prop up the currency. Now those are coming off.

Things now look much rosier on the current account front with oil prices down 40%. This is bullish for economies all around the world (except countries that rely on oil revenue such as Russia and Saudi Arabia), but especially India. Lower energy prices will bring down its high inflation rate.

It’s possible that India could be the leading economy in terms of growth for the next decade. The Indian stock market seems to think so. It’s been on a tear all year. Our emerging markets analyst, Ken Wangdong, also seems to think so. He’s been keeping a close eye on opportunities in India for subscribers of New Frontier Investor.

It doesn’t get as much attention as the other major world indexes, but it’s up around 37% this year.

Not only that, the Indian Securities and Exchange Board recently approved rules for creating real estate investment trusts (REITs). These will trade publicly on the Indian stock exchange. This will see an explosion of Indian investment banks and legal teams to deal with the trusts. This will welcome India into the next (world) real estate cycle.

Callum Newman+
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Callum Newman

Callum Newman

Callum Newman is the editor of The Daily Reckoning and Associate Editor of Cycles, Trends and Forecasts. He also hosts The Daily Reckoning Podcast. Originally graduating with a degree in Communications, Callum decided financial markets were far more fascinating than anything Marshall McLuhan (the ‘medium is the message’) ever came up with. Today Callum spends his day reading and researching why currencies, commodities and stocks move like they do. So far he’s discovered it’s often in a way you least expect. To have Callum’s thoughts and insights on the current state of the currency, commodities and stock markets delivered straight to your inbox, take out a free subscription to The Daily Reckoning here.
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