The Day Oil Spikes

The Day Oil Spikes

US Federal Reserve Chair Janet Yellen must hate the shale industry in the United States.

The poor woman wants inflation to go higher, and that damn oil price refuses to play ball. West Texas crude is still only about US$46 a barrel.

And so the ripples flow!

The Aussie dollar hit a four month high yesterday. Today’s DR explores where the world goes from here. We promise nothing in terms of accuracy or results!

Running at zero

Yellen’s favourite measure of inflation is running at near zero. The Fed is arguing this a short term blip.

Maybe it is.

But right now the markets suggest it will slow the pace of interest rate rises in the USA. That’s taking the stuffing out of the US dollar for the moment. Hence the rise in the Aussie.

If Australian politicians had any brains, they would take advantage of a high Aussie and cheap oil. We could buy up as much we can and sit on it.

The pay-off wouldn’t be too far away. Here’s why…

The coming oil shortage

The International Energy Agency is warning that oil could spike and fairly soon.

This is due to the massive decline in investment over the last three years.

If you want an idea of just how low this has gone, Halliburton says a staggering US$2 trillion has been cut in capital spending since oil collapsed from its 2014 highs.

Halliburton pegs 2020 as the time oil spikes higher.

US shale producers are suppressing the price for now. But conventional oil fields all over the world are being run down.

In the meantime, China and India are getting thirstier for oil by the day.

In fact, China just released its latest statistics on this. Annual oil imports are up 13.8% on the year. That’s now 8.5 million barrels a day. The month of May saw the second highest import figure ever.

This is a huge market for US crude to sell too. And another reason to be bullish on the US. Their shipments to China are now up ten times what they were last year. Exports from America were tipped this week to quadruple over the next three years.

The world will need it all. Let’s not forget about South East Asia. Just yesterday I read the size of Indonesia’s middle class will be in the top ten globally by 2020, too.

If you’re like me, and see the world getting stronger, at some point oil is going to heat up again.

A young consensus is forming around the future of electric cars, no doubt. That’s a growing market.

But there’s a long bridge to be built between today’s hydrocarbon economy and the green-tinged fantasies of vegans and hipsters, where we all live on an organic farm and venerate Mother Earth in between yoga sessions.

Don’t get me wrong. Any oil price spike is not going to happen tomorrow, but we need to track developments carefully here over the next 18 months.

Of course, there are dissenters to this idea. Oil companies don’t get much bigger than Exxon Mobile, and it says new technology and new discoveries will keep supplies plentiful.

But that’s the market…data, conflicting opinions and two sides to every trade.

Follow this stock

Me? I suspect oil is going to spike, but I’m not going to act on it until I get confirmation from the markets.

One way I do that is by keeping an eye on Far Limited [ASX: FAR].

Far is an explorer with permits off the coast of Senegal, West Africa. This is one of the largest oil discoveries in the past few years – there’s a potential billion barrels here.

That’s big.

Far puts the breakeven price here at US$35 a barrel. I’d say that’s about as cheap as it comes these days.

Far is due to start producing in 2021. The next few years are about putting the infrastructure in place to get the oil out. There’s potential upside from further exploration.

But I’m watching it more as a gauge for the oil industry in general here.

You’d think the market would start buying up FAR stock if it gets a sniff of higher oil prices.

Here’s a chart…

Source: Optuma

You can see it’s mostly gone sideways for a long time now.

Let’s watch where it goes from here. Any sustained up-move will be worth paying attention too.

If that happens, the Fed might find they have more inflation than they bargained for.

Best wishes,

Callum Newman
Editor, The Daily Reckoning Australia