How You Could Profit From the Crude Oil Arm Wrestle

One of the world’s biggest games of ‘chicken’ just stepped up a notch.

Depending on who blinks first, there will be huge implications for your wealth.

It’s the biggest story in the financial markets today — but because the mainstream press has a five-minute attention span, you might have missed it.

Worse, you might have caught this story, but fallen for these jokers’ spin that there’s no way to profit from its fallout.

They’re dead wrong. When titans clash, you can reap the benefits.

The game of chicken we mentioned is the arm wrestle over the price of crude oil.

This play has many characters — some shadier than others — but for the sake of simplicity, let’s focus on the two lead actors, Saudi Arabia and the United States.

The Saudis have been cutting the price of crude oil in markets around the world for the past four months.

This has been their ballsy response to the downward pressure on the crude price from millions of barrels of newly drillable American oil.

The Saudi strategy seems to be one of protecting market share at all costs. In their view, if that means lower export earnings, so be it.

For investors, this is uncharted territory. University economics professors are up in arms about Saudi Arabia’s irrational behaviour.

But the Saudis are playing a long game here. American producers suffer more from lower prices than the Saudis do. The Sheikhs of the Persian Gulf are trying to run Uncle Sam out of business.

That’s bad if you’re a US shale oilman. But if you’re an Aussie investor? You can play to win…

Infernal affairs?

This week, the arm wrestle stepped up a notch.

Saudi Arabia just cut prices for crude sold to the US. On Monday, prices on the New York Mercantile Exchange (Nymex) sank 2.2%, to US$78.78 per barrel. That’s the cheapest oil has been in more than two years.

These charts tell the story of why the Saudis are behaving this way. As America’s shale bounty has added more than 3 million barrels per day to the world’s oil supply, the Saudis have faced stiffer competition for their product.

Source: The Wall Street Journal

Most of the organs of the mainstream media are touting this as a diabolical state of affairs. They’d have you believe that high oil prices make the world go round.

We see it differently.

As we told you yesterday, bad news sells newspapers. But it doesn’t necessarily teach you anything useful — or help you prepare to make an investment.

The tumbling oil price will throw up winners. In a market like this, a little common sense can take your investments a long way…

How you could profit

The clearest link most Aussies make with the gyrating price of crude oil is the effect it has on the cost of filling up their car.

Sure, petrol prices have a remarkable knack for rising when the value of crude increases, and tracking sideways after it plummets. A cursory glance of the tabloid opinion pages can tell you that.

But the mighty arm wrestle playing out on the Nymex can overwhelm petrol retailers’ pricing power.

According to the economics team at the Commonwealth Bank of Australia [ASX:CBA], last week the pump price fell by 5.7 cents per litre, the biggest weekly fall in over five months.

If this trend continues, it will put more cash in people’s pockets. For the typical family, these savings aren’t huge, but they’re real. And especially in the lead-up to Christmas, every little bit helps.

The falling price at the pump — and just as importantly, the confidence boost it gives people — may have contributed to September’s surprise 1.2% jump in retail sales. That means Aussie retail stocks could be in for a bumper end to 2014.

But higher retail spending is only one side of the ledger when oil prices fall.

Australian agricultural producers have a ravenous appetite for energy.

As their sales rise over time — as we’ve forecasted for some exciting Australian Small-Cap Investigator stock tips — lower energy costs could meaningfully bolster their profits.

If the Saudi/US arm wrestle continues, it could give those two sectors a real ‘shot in the arm’.

Forecasting oil prices is difficult at the best of times. That’s why you should know that our Resources Analyst, Jason Stevenson, has just unearthed four energy stocks that could skyrocket regardless of how the crude oil arm wrestle plays out.

It’s a resources investor’s dream. And with the pointers we’ve provided, you have the playbook for strong potential gains.


Tim Dohrmann
Small-Cap Analyst, Australia Small-Cap Investigator

Ed note: The above article was originally published in Money Morning.

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Wait until the two big shale plays (Eagle Ford and Bakken) max out and decline, and given the current legacy rates, that day will not be too far away. Then oil prices will soar as the global all-liquids petroleum peak occurs.

Peak oil is comming, get ready.

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