Big Bets Forming on This Oil ‘Blowout’

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This plot just keeps getting thicker than a jar of peanut butter. I’m talking about oil heading to US$100 a barrel.

Yesterday, we talked about Warren Buffett potentially putting US$10 billion into energy company Occidental Petroleum.

Now news comes that oil traders are already using tankers to hoard stock on expectation of a price spike in six to nine months’ time. This is seriously big money flying around right now. 

What’s the full story here? Traders appear to be buying up products such as low-sulphur fuel oil and diesel ahead of the new environmental rule known as IM0 2020. I’ve told you about this many times.

IMO 2020 is due to come into effect on 1 January 2020. Traders are clearly expecting the price of these products to blow out… 

The global shipping industry faces little choice but to switch from the cheap, dirty stuff used now.

Bloomberg quotes[1] a shipbroking analyst as saying, ‘In the coming months, we could see a flexible, low-cost floating tank farm in the Strait of Malacca.

It’s not without risk. Traders not only have the cost of storing and insuring this oil, but they also run the risk of the price moving against them (down) in the meantime.

They do have the odds in their favour though. It seems those closest to the oil industry expect to make a lot of money from this shift.

You might recall I told you previously about the British hedge fund looking to raise US$1 billion to trade this same dynamic. That was back in January of this year[2].

The market is confirming that the last quarter of 2019 will be the key for this trade to play out.

Reuters reports that calendar spreads for low-sulphur gasoil are in ‘contango’ until October this year before switching to ‘backwardation’ from November onwards[3].

That’s all a bit of a mouthful unless you follow the energy business regularly. A contango market suggests plenty of supply while backwardation implies an inventory drawdown.

This is very real, and very big money communicating this clue about the risk of oil spiking because it’s coming from futures contracts. This is where the big hedge funds position.

However, none of this appears to be leaking into the price of oil stocks. There’s an opportunity to acquire them now before the big move happens.  

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Does Trump know something we don’t?

Of course, it’s not without risk. Nothing in the market ever is. There’s a lot of 2019 to go before we get to the start of 2020. But the pressure is really building here.

Warning! Here’s an adage to always remember. The market is designed to fool most of us, all of the time. Something tells me Donald Trump could still play a wildcard here to rattle the market one more time.

Why do I say that? The mystery is why the US government pressed ahead with further sanctions on Iran when it’s clear that the market is already under pressure from the decline of Venezuelan production.

I can say that with some confidence because Chinese diplomats have made their displeasure known despite the trade talks happening now. China is a big importer of Iranian oil[4].

What does America have to gain from goading and stifling Iran? I have no idea.

But already Trump’s voter base in the farm states of the American Midwest are bleeding from his fight with China and low commodity prices.

Bloomberg reported this week that personal income for American farmers fell the most in three years in the first quarter[5]. Rural voters are a key component for Trump and rising diesel prices hurt them. The US presidential election is due in 2020.

That means the Trump administration is prioritising its geopolitical concerns over its domestic popularity. Something doesn’t square off there.

Rising petrol prices in America generally won’t endear Trump further to the wider populace.

It would suggest a possible contingency plan is in place should oil rise uncomfortably high…or Trump is as reckless and idiotic as he appears.

We can’t know for certain, either way. But clearly the market is preparing for oil to go higher. I suggest you do the same by clicking here

Best wishes,

Callum Newman Signature

Callum Newman,
Editor, Profit Watch

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