Disclaimer: The content from The Daily Reckoning Australia’s global cast of characters is their own view and opinion. It is not to be taken as investment advice.
OPEC couldn’t stop this rally even if it wanted to
Uh oh, the oil market is really starting to run up now. Brent crude hit US$85 overnight.
When does it slow down?
I have no idea, but I wouldn’t bet on it being any time soon. Trump’s full sanctions on Iran don’t actually hit until November.
That leaves all of October for the market to wonder just how acute prices are going to get.
The men and women of OPEC don’t appear inclined to do much about it, either.
It’s not even clear if they can do anything about it.
After all, not all oil is the same.
Select refiners could earn huge profits
Iran and Venezuela, for example, produce mostly a heavier crude. Since they’ve supplied the US market for decades, US refineries are naturally geared to process this type of oil.
That becomes a bit of a problem when the major source of growth is coming from the United States shale regions.
This oil is much lighter.
We have a disconnect here that few appreciate.
Wood Mackenzie is a research house from the UK.
One of their analysts pointed out in Forbes last week that the world is on track to start producing a surplus of gasoline shorty.
That’s because US oil yields a lot of this, and demand is stagnating.
The pressure on oil prices is coming from a different section of the market.
I’ve written about this before.
It’s demand for low-sulphur diesel.
The world’s refining system over the last century was not built to cope with today’s market.
It’s going to cost the industry a lot of money to catch up to the new reality.
However, the industry is responding. The only question is if they can act fast enough to prevent oil from hitting US$150 a barrel.
Exxon Mobile is one to watch here.
Last Wednesday, it announced that the first phase of an upgrade to its Beaumont refinery in Texas was complete. This can turn US shale into low-sulphur refined products. It also cost US$500 million.
The company is also going to spend £500 million upgrading the UK’s largest refinery.
That’s serious money and time needed.
There could be a very profitable gap between today’s strengthening oil price and the time it takes the refining system to upgrade.
Any company that can meet this demand for low-sulphur refined products is well-placed to cash in now.
Two stocks you might like to put on your watchlist are US energy companies with exposure to refining like Phillips 66 [NYSE: PSX] and Marathon Petroleum Corporation [NYSE: MPC].
Please – I’m not saying rush out and buy these tomorrow.
But crude oil will ultimately follow the direction of refined product prices.
If these refiners are enjoying good margins – crude oil will likely stay high, and opportunities in the energy sector will abound.
Don’t forget, either, that a lot of oil stocks produce natural gas, both intentionally and as a by-product.
It’s not the main game, but it’s another source of cash to cover fixed costs.
Natural gas in the US went up about 10% over the last few weeks.
That means unhedged energy firms are getting two tailwinds right now.
This is going to show up in higher earnings for firms in this sector in the USA and Australia.
Aussie mining in the sweet spot
This higher cash flow is also going to give a kick to further exploration.
That’s good news for the Aussie economy.
The Australian Financial Review reported on the weekend that funding for exploration firms was up over 50% in the second quarter over the first.
That’s the highest in two years.
My fellow editor, Shae Russell, told me yesterday that she’s hearing about a shortage of geologists starting to appear.
I see a very bright outlook for the commodities sector on the ASX over the next 12 months or so.
It will get an even bigger kick if the Aussie dollar goes down further. It’s already in a pretty sweet spot.
We’ll have to see on that as we go.
But there are going to be a lot of opportunities coming up.
You might be surprised to hear that. I get the general impression most people think Aussie stocks are going to stagnate at best from here.
Not only that, but the so-called ‘Trump’ rally is finished in the US, as well.
I find it more striking how resilient both share markets have been during the entirety of 2018.
Both are still around their recent highs, and companies are still growing their earnings.
In fact, I released my latest issue of Small Cap Alpha last night. I made the point how astonishing it was that there could still be so much growth to come from the tech sector, even with the Nasdaq up over 450% since 2009.
And with property cooling in Sydney and Melbourne, we might just find a lot more risk capital flowing into equities instead.
That’s why I’m so excited to be launching my service, 100% free, called Profit Watch.
I think 2019 is going to be the most exciting year for the ASX since about 2012.
And with Profit Watch, I’ll do everything I can to help you take advantage of it.