Why You Should Focus on Crude Oil’s Younger Sister

I’d rather be a buyer than a seller in this market. Pretty much everything — gold, stocks, copper, iron ore and crude — has gone up.

Of course, as we argued yesterday, the trend in motion doesn’t mean it will stay in motion.

Financial markets are complex beasts.

You should always be on your toes, waiting for the market to change gears. When the trend changes, there are massive profit opportunities up for grabs.

My colleague, Greg Canavan, believes he’s spotted precisely this kind of opportunity heading our way. The market doesn’t know about it yet. Greg is well ahead of the bell curve. He’s picked three stocks that could skyrocket from the looming ‘supply’ shock.

Before I tell you more, let’s look at oil

Geopolitical risk surging with oil

Crude oil is one of the most heavily traded markets in the world. And you wouldn’t want to be short so far this year. Following Donald Trump’s inauguration, rising global tensions, and OPEC’s supply cuts, crude has rocketed higher.

Brent crude, the international benchmark, has surged to roughly US$56 per barrel. That’s about 101% higher than the low of US$27.83 per barrel on 20 January last year.

West Texas Intermediate (WTI), also known as US crude, is trading at US$53 per barrel. It’s up 103% from the low of US$26.05 per barrel on 2 February last year. It’s also up about 26% from the low on 14 November.

Donald Trump has contributed greatly to the oil price surge. He (rightly) believes that former US presidents (no need to name drop) negotiated terrible deals for the US. In a shock to the world, Trump has come out swinging to try and turn the situation around. He’s bluntly accused other nations of taking advantage of the US.

Trump wrote in a tweet last week:

Iran is playing with fire — they don’t appreciate how “kind” President Obama was to them. Not me.

The US president just implemented more sanctions on the country. Iran violated the 2015 nuclear accord, which Trump called ‘another terrible deal’, by launching a ballistic missile test. Sky News reported on 5 February:

Iran is holding a military exercise to test its missile and radar systems, a day after US President Donald Trump’s administration imposed sanctions on Tehran for a recent ballistic missile test.

The US sanctioned 13 individuals and 12 entities related to Iran’s missile program and Trump’s national security adviser Michael Flynn said the United States was putting Iran on notice over its ‘destabilising activity’.

Iran’s Revolutionary Guards website said that the aim of Saturday’s military exercise in Semnan province was to “showcase the power of Iran’s revolution and to dismiss the sanctions”.

Iranian state news agencies reported that home-made missile systems, radars, command and control centres, and cyber warfare systems would be tested in the drill.

Iran has test-fired several ballistic missiles since the nuclear deal in 2015. The latest test, however, was the first since Trump entered the White House. Trump has made it clear that he will stop the missile program.

All we can say is…good luck.

Obviously, Iran doesn’t give two hoots what the US president thinks. Nevertheless, geopolitical tensions are going through the roof — and so are oil prices.

The story can quickly change

The situation could soon take another turn for the worse.

Iran, which produces around 3.7 million barrels of oil per day, was welcomed back to the global oil markets last year. The US officially lifted its crippling oil export sanctions in January 2016. Iran didn’t waste any time and quickly accelerated oil production.

Make no mistake: Trump could easily put the oil sanctions back in place. Assuming that happens, crude prices would probably surge higher in the short term.

MarketWatch reported on 6 February:

Even though the country is a participant in a production-cutback deal spearheaded by the Organization of the Petroleum Exporting Countries, Tehran is said to be aggressively seeking fresh investment to help jump-start its antiquated petroleum industry. A reinstatement of sanctions would derail its plan.

Along with the geopolitical and policy upsides, analysts say the apparent success of the output-cut agreement forged late last year is also fueling optimism that oil-producing nations are serious about slowing down their production to boost global oil prices.

The crude markets are tightening. If Iran is forced to ‘roll back’ crude exports, oil prices could surge beyond US$60 per barrel. That could put a rocket under some of the best crude stocks…at least from a short-term perspective.

S&P Global Platts statistics show crude supply has been reducing. OPEC members reduced output of their required cuts by 91% this month. Remember, OPEC agreed to cut exports into June to boost crude prices. The 11 other non-OPEC producers (who also signed up to the deal) have reached a 75% compliance level.

But bear in mind, we don’t know whether any OPEC members are lying. There’s a lot of corruption in the world. OPEC has been caught multiple times for falsifying its records. Regardless of the truth, however, oil markets have bought into the rumour of ‘lower’ supply.

I’d say that unless new sanctions are placed on Iran, you shouldn’t be terribly optimistic on crude in the short term. Technically, there’s a lot of resistance around the US$60 per barrel level. There are still a few bucks left on the table. But if you want to make really big money, you should focus elsewhere.

Australia’s supply shock on the way

There could be another supply shock on the way. This time in a market — a forgotten market — that’s closer to home. We’re talking about Aussie natural gas — crude’s younger sister. Greg Canavan analysed the issue in his latest special report:

Gas that was formerly destined for domestic markets in Sydney and Melbourne is now heading north for Curtis Island.

The three giant LNG plants are sucking all the excess supply out of the market.

Gas from the Cooper Basin on the South Australian border…and even as far away as Victoria’s offshore gas fields, is heading to international markets to take advantage of higher prices.

That means less gas available for Aussie households and businesses. Which means higher gas prices are on their way.

Greg could be on to something big here — especially with LNG companies moving away from ‘oil linked’ prices. LNG prices are dependent on pure demand and supply. Meaning, gas prices don’t depend on crude prices.

While that’s not great news for our electricity bills, it spells big potential gains for investors. Remember, gas prices in many markets have already doubled…without the supply threat. If Greg’s right, and you want in on the big gains he predicts, take a look at Greg’s report here.

Regards,

Jason Stevenson,
Editor, Markets and Money


Jason Stevenson is Markets & Money’s resource analyst. He shares over a decade’s worth of investing and trading experience across resource stocks and commodity futures and options. He originally studied accounting and finance at Curtin University, where he was awarded a first-class honours degree. His professional background stems across high-net-worth, top tier accounting (corporate finance, tax and auditing), and sell-side equities research. Before joining the team at Markets and Money, Jason worked at boutique firms which advised fund managers and high-net-worth clients on where to invest. Whether it’s gold, crude oil, copper or an obscure metal like vanadium, you can rely on an in-depth analysis in Markets and Money. Jason also brings you extensive macro, political and geopolitical analysis from around the world. He leaves no stone unturned when it comes to telling the truth. Jason is also the lead analyst of Gold Stock Trader, a premium service for investors serious about precious metal stocks. Websites and financial e-letters Jason writes for:


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