The US Energy Renaissance

The US Energy Renaissance

The mainstream headlines are still screaming about a trade war happening now, but you wouldn’t know it going off the statistics from the Panama Canal.

The Wall Street Journal reports that US shipments of LNG and petroleum are booming as American tankers cut through the Americas on their way to Asia.

Japan, China and South Korea are huge — and hungry — markets for clean burning gas. This looks very bullish for the US, and for the world in general.

We’re still in the early days of an American energy renaissance that will export cheap energy all over the world. LNG shipments through the Canal could hit 12 million metric tonnes by the end of this year. That’s come from nothing in 2015.

It’s no wonder when you look at what’s happening with US natural gas production. First came the shale gas fracking companies. Now the oil guys are producing so much gas as a byproduct of their oil wells that it’s generating a massive surplus far beyond what America needs domestically.

Natural gas prices were over US$10 after 2008 and stayed above at least US$4 until 2012. Today, the price is around US$3. This low-cost energy is a massive advantage for US manufacturers and domestic companies.

It’s probably part of the reason the US small-cap index is also booming. These companies generally service the American domestic market. And the best measure of US small-caps — the Russell 2000 index — keeps pushing into all-time new highs.

And why should you care?

Well, it’s a very good sign the US economy is healthy and that the overall bull market in US stocks can keep going. This sets a strong lead for the Australian market to follow.

My colleague Steve Sjuggerud likes to say that bull markets don’t die of old age, but they do pass on from ill health. A booming small-cap sector is one of the vital signs he watches to measure how the equity market measures up. Things are looking good here.

Today’s edition of The Australian cites an investment analyst who suggests there could be a rotation into smaller US companies as investors shift out of the big tech stocks.

Maybe. More of my interest was around his research trip to the US and his comment that wage pressure is building in the US economy, and just how strong the US consumer is looking right now.

This keeps bolstering my case that commodities are the asset class to watch from here. There’s just so much construction and demand happening all over the world, and supply is crimped.

It won’t be a smooth ride, however. Gold and oil slipped last week as the trade war fears keep rolling around the world. But it’s notable that the US stock market didn’t sell off in a major way. You might recall that the US market fell sharply in February when the trade war fear first hit the market.

The health of the global economy is not the deciding factor anyway. One of the best decades of all time for raw materials was the 1970s. Certain commodities saw staggering gains, despite the fact that the general economy was dismal and the US stock market did mostly nothing for 10 years.

Miners have to invest with the future in mind, years ahead. Look no further than BHP, which gave the go-ahead to its South Flank mine last week. It won’t start producing until after 2020 and will keeping going for 20 years.

I’ve made the case for a while that we’re going to see more mergers and acquisitions in the mining space. We’re seeing more action on this front.

South32 Ltd [ASX:S32] announced this morning that it’s going to fully acquire Canadian firm Arizona Mining Inc. We’re talking big figures here — US$1.3 billion. The offer is also a 50% premium to the closing price of Arizona on 15 June.

That’s the type of gain you can make quickly when the merger and acquisition cycle heats up, and the kind of thing I’m hunting for right now.

It’s also interesting to note that Arizona’s main asset is the Hermosa base metals project. These metals are considered to be highly sensitive to economic growth. So the management at South32 must like what they see in the future.

So do I. That’s why I think now’s a great time to be accumulating stocks with great projects, run by good people with a bright outlook. This type of thing doesn’t last forever. The time to make the most of it is now.

Regards,

Callum Newman Signature

Callum Newman,
Editor, The Daily Reckoning Australia