The Confederacy of Fossil Fuel States

The Confederacy of Fossil Fuel States

We’re going to find out just how strong the current oil rally is over the next three months.

This is the period when crude normally settles down as the northern hemisphere heads toward winter and demand drops.

But this year is different.

US President Donald Trump is warding off Iranian oil from the world market.

By November, it will be a full lock-down.

Trump presumably has his eyes on regime change. Perhaps he might look in his own backyard. Specifically, Texas.

That’s because the discount between WTI Midland and WTI Cushing crude is US$16 a barrel.

What’s the significance of this?

These are two different US oil benchmarks, and that gap is abnormally high by historical standards.

The difference tells you that the producers in the Permian basin are having trouble getting their oil to market. There’s simply not enough pipelines.

That could soon become a problem for the global economy.

The US is leading the world in growing oil supply.

Thank the good Lord too, because somebody has to make up for the loss of Iran and Venezuela. These are two of OPEC’s heavyweights.

Four key IPO’s to watch in 2018

It’s no wonder that Brent crude is pushing back towards US$80 barrel.

In fact, you might wonder why it’s not higher!

Supply is crimped, and demand looks rock solid.

We’ve got some hard numbers on that.

Two major refiners in China just released their latest numbers. And the profits are stonking. Sinopec, for one, had its best half year in 18 years of operation. It also forecast strong demand in the second half for fuel products. Only time can tell on that.

One perennial question for oil is at what point high prices begin to destroy demand.

Once upon a time, the global consumer didn’t have much choice but to put up with what was on offer. That’s not quite true when it comes to gasoline now.

The alternative is to run an electric car. The options are many, at least in China. There’s said to be 500 different auto brands to choose from. One of them is about to list on the New York Stock Exchange. It’s called NIO.

We’ll keep an eye on this one. The company could raise a potential US$1.3-1.5 billion. It styles itself as a competitor to Tesla.

Regardless, it’s a gigantic amount of money for a company with US$7 million in revenue and one model in production.

For our purposes, it might be a reasonable test of sentiment toward new energy vehicles, and perhaps even China in general. It’s not as if China is viewed as the hot place to be right now.

First of all, we have the trade spat. Then there’s the feeling that something’s not quite right over there. The head honchos in Beijing have cut reserve requirements for the banks, injected more liquidity into the system, and now they’re cutting taxes as well.

Then again, the bellwether stock for the Chinese consumer market is Alibaba Group Holding Ltd [NYSE: BABA]. It grew revenues in the second quarter by a staggering 61% on the previous year.

China is always sending mixed signals. That’s certainly true of the lithium market right now, too.

This year, Chinese spot prices for lithium have tumbled. That’s spooked the market, which has largely dumped the associated stocks.

It’s time to buy the dip on lithium

In hindsight, it looks like panic selling. Lithium is now a world market and many of the producers set their own prices to buyers, regardless of the spot price.

This is one reason why some of the producing lithium miners are releasing excellent numbers right now.

That puts another couple of upcoming IPOs right in the spotlight.

FMC Corp is going to list its lithium division called Livent. It wants US$100 million in its quest to become a dominant supplier. Then, two big Chinese lithium companies are going to list in Hong Kong as well.

So, there’ll be plenty of signals into the second half of the year on how the industry is tracking.

I think the dip in lithium stocks is providing opportunities to buy. Just look to California for part of the reason why.

The Assembly there have just passed a bill that will require the state to source power from 100% ‘clean’ sources by 2045.  60% of renewable energy sources need to be in place by 2030 if all this gets the final sign-off.

This trend is unlikely to slow down anytime soon. We may look back in a few years and realise the capital markets were too slow to finance the kind of projects to make this future a reality.

Consider that the frackers in the Permian basin are flaring about US$1 million dollars-worth of natural gas every day.

To flare gas simply means to burn it off to get rid of it. That’s about the same as running two million cars, according to the Wall Street Journal.

One wonders how long this kind of resource prolificacy can last.

If economics doesn’t change it, politics soon will. Colorado voters may soon effectively ban shale wells across the state come November.

Perhaps the US could even see a historical repeat of the slave states versus the free ones. Instead, it could be the fossil fuel states versus the renewable ones.

This issue won’t go away. And I believe it could bring some huge opportunities. Stay tuned — more on those next week.


Callum Newman Signature

Callum Newman,
Editor, The Daily Reckoning Australia