Oil Price Shows the Global Economy is Strong

oil stocks

Markets make opinions, goes the old saying.

Nowhere is that more true than in the oil market right now.

The mood is changing when it comes to the global view on energy. And the view is changing because the market is forcing investors to re-think the long held view that the oil price will stay ‘lower for longer’.

From the Financial Times:

One of the world’s biggest commodities traders says the “lower for longer” era of low oil prices is nearing an end, as Brent crude approaches a more than two-year high of near $60 a barrel. Ben Luckock, co-head of group market risk at

Trafigura, said the oil market was turning a corner and a belief by some market players that prices would remain within a tight $40 to $60 a barrel range would not play out. “We are nearing the end of ‘lower for longer’,” Mr Luckock said in a presentation to the annual Asia-Pacific petroleum conference on Tuesday. “This theory may have had its best days.”

To be honest, the ‘lower for longer’ view on oil was reaching an end a long time ago. It’s just that such a view would not have gained any traction when the oil price was languishing. Journos need ‘proof’ to espouse such opinions, and the only proof is price.

So when Brent crude hit a two-year high on Tuesday, it opened the door to question the ‘lower for longer’ groupthink.

Don’t get me wrong, I don’t think oil is going back to US$100 plus per barrel anytime soon — if at all. There is plenty of supply out there, and one of the reasons for oil’s ongoing rally is a concerted attempt by OPEC to restrain output.

But that doesn’t mean prices can’t continue to rise and oil producers can’t enjoy a decent share price upswing. The sector has been smashed up for so long that there are still plenty of bargains, if you look hard enough.

I’ve been building an exposure to energy stocks in my Crisis & Opportunity newsletter for the past 12 months. And I’ve just completed some research on another microcap energy play that is, frankly, ludicrously cheap.

Based on my projections for earnings for the 2018 calendar year, this company trades on just two times free cashflow! It’s been forgotten in the oil bear market because investors bought into the ‘lower for longer’ theme. But now it’s ‘lower for not much longer’, and stocks in the sector are set to rise.

My subscribers have received that research. You can too by clicking here.

While I’ve been bullish on energy for some time now, what made me really confident that we’re at the start of a new bull market was these comments from the CEO of energy major Shell, back in July. From the UK Telegraph:

Royal Dutch Shell is bracing for a peak in oil demand by the end of the next decade by edging towards renewable power and the electric vehicle industry.

Shell boss Ben Van Beurden said the oil major had changed its company mindset to a “lower forever” oil price environment and is focusing on being “fit for the forties”, in reference to the faltering oil price, which has struggled to remain above the $50 a barrel mark.

That’s a classic rear view mirror statement.

More broadly, the rally in oil prices tells you the global economy is healthy. And, if sustained, that should feed through to higher inflation and higher interest rates.

But that’s not having a noticeable impact on the Aussie market. Stronger global growth should push the market higher, but the broader ASX 200 continues to tread water.

However, don’t let the large-caps fool you. Small-cap stocks are moving. This is where the action is, as you can see in the Small Ordinaries chart below:

Small Ordinaries Chart 28-9-17


Source: Optuma

As you can see, small-cap stocks broke out of their 2017 range in late August. The index has retreated to the break out point over the past few weeks, so I would expect to see a bounce here, and an eventual move to new highs.

If it doesn’t play out like that and small-caps fall back into their 2017 range, which would be bearish for the overall market. I don’t think that will happen, but it’s worth keeping an eye on.

And besides, the oil price is telling you that global growth is robust. That should keep stocks moving higher in 2017.

Regards,

Greg Canavan,
Editor, Crisis & Opportunity

Greg Canavan

Greg Canavan is a Contributing Editor at Markets & Money and Head of Research at Port Phillip Publishing.

He advocates a counter-intuitive investment philosophy based on the old adage that ‘ignorance is bliss’.

Greg says that investing in the ‘Information Age’ means you now have all the information you need. But is it really useful? Much of it is noise, and serves to confuse rather than inform investors.

Greg Canavan

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