Oil is threatening to break US$100 again. That’s not what we want to see with inflation still an issue and flat real wages growth.
This immediate move north is taking me by surprise too. I assumed the oil rally was out of puff when it was around US$75 a month or two back.
Therefore, I have no problem giving a hat tip to my colleague Greg Canavan, who did see the current rally before it happened — and acted on it!
His subscribers are now benefiting as high oil prices pour a river of revenue through some of his recommendations.
What’s driving the rally?
Saudi Arabia is doing everything they can to keep prices high by limiting their production.
In other words, they’re giving the world the middle finger and making a motza at the same time.
We also have diesel ‘cracks’ at roaring levels now. Diesel prices are up 40% since May.
That hurts most of us, because the global economy runs on diesel.
However, refiners — the businesses that buy crude oil and process it — are making a fortune for every drop of diesel they can bring to the market.
That gives them every incentive to keep bidding up crude oil while this continues.
That’s not a great signal for the economy in general. High diesel prices are essentially a tax that removes further discretionary power from consumers.
However that doesn’t mean you can’t make a buck from this dynamic in the stock market.
Refiners are one idea. Oil producers are another.
Let me tell you something too. It’s tough going out there in the share market currently. I don’t recall a time when so many sectors are suppressed, at least as the ASX goes.
The market comes under constant selling pressure lately too.
One way to hold with confidence through this difficult period is to know your companies are making a lot of money.
To paraphrase Warren Buffett, in the short term the stock market is a voting machine. In the long run it is a weighing machine.
What he means is that real cashflow is what drives stock earnings, and that, in the end, drives stock prices up.
In fact, you can often consider buying big cash producers when the market sells off.
After all, you’re acquiring a growing stream of cash flow — if you’re right — at a discounted price on the day.
I made the case last week for iron ore producers with the same logic. But oil is just as good right now. All we want really is a business with fixed costs and growing margins from higher commodity prices.
Generally speaking, this is what explains the relative robustness of the Aussie share market over the last year or so.
High commodity prices for oil, gas, and coal are driving big cashflows through the producers.
Nobody, as they say, sells a gold mine!
And if oil — and iron ore — rise from here again these type of firms will make even more money.
Here’s another benefit.
Most oil producers are paying out these profits as dividends to their shareholders, in the same way Rio and BHP have done the same thing with higher iron ore prices since 2019.
That is to say, these commodity producers are not reinvesting their profits back into exploration and new mines or wells.
Why would they? Everyone is keen to tell oil producers that their business is in decline and a pox on the global house.
Unfortunately, this doesn’t quite square with the fact that we still need to provide 100 million barrels of oil a day just to stay where we are.
And every day, the known existing reserves of oil run down a little further.
We have gotten away with this dynamic for so long now that few people would stop to think about it for a second.
But major oil projects take billions of dollars to find and develop. They might produce for decades.
But there’s the catch, you see. The world is coasting off oil supplies found and developed back in 1990s and 2000s outside of North America.
The 2010s brought the US ‘shale gale’.
However, shale wells decline faster than conventional wells.
And Wall Street — investors, in other words — underwrote the boom in US shale production.
They were prepared to swallow big losses that benefited consumers but, ironically, not themselves.
Those days are long gone. Money on Wall Street is not 1% anymore. It’s five times that. And oil can’t sing a song like AI or flying cars or genetics to attract what capital is available.
In other words, nobody is going to finance another wave of shale like last time.
That means, if not today, but very soon, the world is likely to get very short oil, if it isn’t already.
And the history of commodities says good luck bringing that to heel in short order.
You can’t flick your fingers and bring it online like an Amazon order. And we know the US is running down its emergency reserves to meet today’s pressing price.
One of the historians of oil once described the post Second World War consumer as ‘Hydrocarbon Man’. He was living in the suburbs designed to cater for the car.
The conceit of the consumer today is to think they have left their hydrocarbon lifestyle behind.
But as US$90 oil shows, ‘Hydrocarbon Man’ is still with us, and he ain’t going away in time for Christmas.
As I mentioned, Greg Canavan has been all over this story. He started recommending ‘hydrocarbon’ stocks to his subscribers back in the dark days of 2021.
Now, he has a different take on this story, with a few less obvious ways to play it. Keep your eye out for a special presentation from Greg LATER TODAY.
Best wishes,
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Callum Newman,
Editor, Money Morning
PS: While you wait for Greg’s presentation to hit your inbox, be sure to check out this crucial Net Zero interview…
| Net Zero…Are We Being Lied To? – Interview with Aiden Morrison |
‘Minister for Climate Change’, Chris Bowen constantly tells us that wind and solar are the cheapest forms of energy, while nuclear (the most efficient form of energy known to humanity) is too expensive.
But such claims — as you’ve heard from the other showcased interviews this week with Rob Parker of Nuclear for Climate Australia, former Liberal Senator and founder of the Australian Conservative party, Cory Bernardi, and Professor Ian Plimer, a geologist and climate alarmism critic — don’t pass the smell test. Or the pub test.
Is it an honest mistake? Or are you being lied to?
If you’re sceptical of claims like this but don’t exactly know how to articulate why — make sure you watch Greg’s interview below with data scientist Aiden Morrison.
Aiden’s data-sleuthing has revealed some serious flaws in both the CSIRO’s Gencost report (the basis for Bowen’s claims) and AEMO’s ‘Integrated System Plan’. If he’s right, then what is happening with Australia’s energy transition is truly shocking.
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