Low Oil Prices Is GREAT News for This One Sector
Another day slowly crawls by and I utter the phrase ‘Whew, what a week’ to myself again…only the week isn’t over.
After March felt like it took forever, April is moving at a more reasonable pace.
Although the days feel much longer. And I’m never quite sure whether it’s the weekend or a weekday anymore.
In spite of the slowness of the hours and days, I was reminded just how quickly markets can move earlier in the week.
As I explained on Tuesday, like many perplexed investors I woke up to the news the US oil price had tanked overnight…
…which would normally see investors flock to airline stocks.
Afterall, if you reduce the cost of one of their major expenses, it’s good for an airline company’s bottom line.
Except none of us are going anywhere at the moment.
Not only has the price of energy tanked, so has the demand for that energy.
Airlines might not benefit, but there is one sector that will do well with rock bottom oil prices…
The destruction of the US dollar
The severity of the US crude price falls only really began to sink in yesterday…
‘Oil price collapse is a wake-up call for stock markets’, wrote the Australian Financial Review.
‘Crude oil plunge challenges renewed faith in “junk” bonds’, said MarketWatch.
‘Oil-Price Crash Deepens, Weigh on Global markets’, the Wall Street Journal told people yesterday.
And these were just a sample of the oil-related headlines I noticed yesterday.
Although as I explained on Tuesday, the unprecedented (there’s that word again) smashing of the West Texas Intermediate (WTI) May futures contract at the start of the week is a signal that perhaps all isn’t right within the markets.
There’s hardly any planes or buses or cars going anywhere.
The demand for oil has completely sunk.
I last put petrol in my car eight weeks ago and I still have half a tank left.
Plus with my shiny new bike I’ll be using the car even less…
Nonetheless, mind-bending break down in the crude price is going to splinter the markets. And the long-term impact isn’t yet known.
It’s no longer just airlines that will be looking for government support. Chances are some shale oilers are going to go hat in hand to the US government seeking a buck or two.
Depending on how long the fire sale prices last, major US oil firms may lean on a US politician reminding them of their ‘financial’ or ‘public’ support over the years.
To boot, many oil producers are probably better leaving the thick black stuff in the ground for now. One energy consultant pointed out earlier in the week that demand for black gold is falling two to three times faster than supply.
These are the obvious casualties, and perhaps the smaller ones.
The bigger ones are all those exchange traded funds and corporate oil bonds that draw their value from the underlying oil price.
Sure, few people care about the holders of corporate bonds losing money.
But the majority of people who buy ETFs are retail investors looking for exposure to the commodities market, without fully understanding the risk that comes with the commodities markets…
The US on the other hand, has much bigger structural problems on their hands.
One being the continued erosion of the US dollar. The petrodollar system is being pulled out from underneath them. And as I explained here a couple of years ago, the value of greenbacks relies on the petrodollar.
The insane price action we saw in US crude earlier in the week isn’t just a demand and supply problem.
The wealth and stability of an entire economy rests on it having value.
Deflation in play
The D word seemed to be everywhere yesterday.
Nope not depression.
I’m talking about the other D word governments and central bankers don’t like…deflation.
Yep. Even in a world flush with money printing and ‘whatever it takes’ central bank stimulus measures, the short-term impact for us is the falling price of goods and services.
Oil has been an inescapable topic this week.
That’s largely because it’s not just a price story, but a reflection of collapsing demand in an economy reliant on energy and consumption to function.
My point is, what we saw on Tuesday isn’t a simple price mismatch between buyers and sellers.
The low oil price signals that deflationary forces are in play right now.
It wasn’t that I cottoned on to the trend before the mainstream did, it’s that I know who to talk to.
Perhaps the one sector that will benefit from low oil prices will be gold miners.
Especially Aussie gold miners.
Already our Aussie gold miners are banking serious coin with the difference between the Aussie dollar gold price and the US dollar gold price. Lowering their costs of a major energy source will be a boon for many.
Around 50% of total production costs for gold miners can be directly related to the price of oil.
Think of it like this.
Higher gold prices make them more profitable. And lower energy costs will boost their margin.
Don’t know where to start when it comes to gold or gold miners?
Never fear. This is my jam. Check out who I’ve been talking to here, and I’ll show you how to get started.
Until next time,