Why US Energy Will Fire World Growth

Why US Energy Will Fire World Growth

Feel that heat?

That’s petrol prices firing up.

Average pump prices are the highest they’ve been since 2014.

And it’s going to get worse, according to Caltex chief Julian Segal.

One reason is the Aussie dollar. Fuel imports become more expensive the lower the dollar goes.

In addition, the strong rally in crude oil is also raising the base cost.

This could begin to squeeze one stock in particular…

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You may have guessed that I’m referring to Qantas Airways Ltd [ASX:QAN].

The company already flagged an extra $200 million in fuel costs earlier this month.

Regardless, the stock is up slightly since. Revenue is up and the company is actively buying back stock.

But how long before the market begins to worry about this?

I dug around some recent Qantas reports to see to what extent their fuel exposure is hedged.

I didn’t get a clear picture.

Here’s why I’m wondering: Oil may not get cheaper for a while. In fact, it could get very expensive.

An analyst at Bank of America says it could hit US$100 a barrel next year.

What worries me is that not all barrels of crude are created equal.

Some are known as ‘light’, and others as ‘heavy’.

US shale oil — the key source of supply right now — is fine for refined products like petrol.

It’s not so good for what are known as ‘middle distillates’. Think diesel and jet fuel.

Diesel demand is strong. That’s in part because it’s intertwined with global growth: trucks, ships, diggers, cranes and generators all run on diesel.

What’s more, the world is booming too, raising demand for energy. Strong airplane orders and flight statistics are proof of this.

But the supply of heavy, sour crude — better for supply of jet fuel — is less than the headline oil production figures suggest. That’s because US oil dominates the increase in production being reported.

So it’s possible Qantas may face even higher costs for jet fuel than even the rallying crude oil price indicates.

In any case, it’s been an epic rally in Qantas’ share price since 2014. One now wonders if the trend might be turning against it.

That’s why you might be better served digging around for opportunities in energy stocks instead…

More profit now even with oil 25% cheaper

The Financial Times reported recently on European oil majors like Royal Dutch Shell and Total. They’re now generating positive cash flow and paying dividends from it.

One analyst says that they’re making more money per barrel than they did when oil was at $100. That’s because they’ve cut costs to the bone.

I’ve made a strong case for the ‘wildcatter’ energy stock in my Small Cap Alpha buy list. But there are plenty of other energy plays in the market.

All in all, it should provide a boost to capital spending in Australia.

WorleyParsons is an engineering company. They had their annual investor day on Wednesday.

The CEO reckons a new wave of spending is going to come from the petroleum and mining industries.

Capital expenditure is down 60% for mining from 2013 and 40% lower for oil and gas.

This needs to rise just to meet existing demand. Oil fields deplete at 5–7% a year and demand is going up at 1% per annum at least.

He’s especially positive on Australia because he thinks the LNG plants will need to stay well supplied.

I hope explorers and producers are given every incentive to go out there and get on with it.

Australia’s troubled energy policy is still a thorn for businesses and consumers.

Building supplies manufacturer CSR warned rising power costs are going to impact its earnings in the years ahead.

You have to be wary of any company in your portfolio that’s exposed to this.

It might even apply to your job. Incitec Pivot, which markets and distributes industrial chemicals and fertilisers, warns it will close its fertiliser plant in Queensland if it can’t source cheaper gas. That’s 450 jobs on the line.

The rise in oil is exacerbating this. A lot of LNG contracts are linked to the price of oil, so the higher it goes, the higher the price of LNG goes too.

That incentivises gas producers to bypass the domestic market.

This is one reason the boom in shale gas from the US is great news for the global economy. It will allow the US to export it all over the world and help keep the price of energy down.

The US has tentatively begun to do this, but it only has two functional export terminals at the moment.

More will come online in time. Soon, much more US gas will be heading to China, Japan and South Korea alongside Aussie gas.

There’ll be no shortage of it, that’s for sure. The prodigious rise in oil production from the US shale basins is taking up natural gas supply with it.

This should take the US’ dominant position in world affairs even higher than it is now.


Callum Newman Signature

Callum Newman,
Editor, The Daily Reckoning Australia