Shiver me timbers! Just what is going on in the Middle East right now?
We left things on Friday with the thought that now is the time to be accumulating energy shares.
And not a day passes before Iran announces that one of its oil tankers has been hit in a possible terrorist attack.
But, by which group?
Apparently no one has any idea and nobody is claiming it, either. But there’s an oil slick, possibly 200 kilometres long, to show for it. Oil prices rose on Friday.
Last week, I told you the cost to charter major oil tankers had tripled recently.
Insurance isn’t going to get any cheaper as these kinds of attacks keep repeating.
I tell you: oil shares like this one I have here for you — that are outside the Middle East — are the ones to buy now.
Let me reiterate this stock has a perfectly good business model with oil at $US60.
An oil price spike — looking more likely by the week — is just potential cream.
Oil is not just shifting to events in the Middle East either. It’s working in favour of Donald Trump…
What’s happening in the Middle East right now is driving China’s move to appease the US in the latest trade talks.
A partial trade deal was inked last week, even if it really just stalls for more time.
China is the world’s biggest oil importer. That makes energy imports a strategic weakness.
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If the Middle East sea lanes are disrupted, then the only major alternative for secure supply is the US.
Canadian oil can’t reach China (the excess can’t even reach the US) and Venezuela is in all sorts of problems.
That gives China a major headache. The Middle East brings massive geopolitical tension.
The US brings Donald Trump. That’s an awkward position, to say the least.
We’ve already discussed the idea that Trump could move to ban US oil exports on the grounds of national security.
It was that way for 40 years before Obama came along.
It’s not beyond the realms of possibility.
US oil is likely to be in shorter supply soon enough. Bloomberg reports that drilling rigs in the US are now down 20% since last November.
They’ve fallen for 10 months in a row.
The US Energy Information Administration has cut its forecasts for US energy growth four times this year.
A lot of shale companies have big debts and are diverting cashflow away from production toward bonds and shareholders.
China also has another massive problem away from the energy market…
China: food insecure now, too
It’s the African swine fever decimating its pig population.
This may seem obscure — but look at the statistics…
China has 40 million pig farmers and pork accounts for 60% of its protein consumption.
African swine fever has no cure and no vaccine. This will drive inflation up in China, at the very least.
It’s interesting to note that, as part of the recent trade truce, China immediately agreed to buy billions in US agricultural produce.
It would appear China is on the back foot in the current trade dynamic.
And yet you wouldn’t know going off the iron ore price. It’s still trading above US$90.
Still, I’m not reading too much into this latest trade ‘deal’. The major issues are left unresolved.
That means the recent lift in the stock market after the announcement might fade sooner rather than later.
We’ll know soon enough as the latest earning announcements filter through for the last quarter in the US.
Here in Australia, I still think the wrestle for the market is over the banks.
Now we discover that the treasurer is telling the ACCC to investigate the pricing of residential mortgage products.
The final result will be known by 30 March next year.
That adds another small headache to what is already a murky outlook for the industry.
That, in a broad loop, is another reason I like energy stocks at the moment.
Why Invest in Energy Stocks?
There’s no bright expectations or heady narratives baked into their prices.
That means there’s a very good pay off if I’m right, and likely not a hefty downside — under normal trading conditions — if I’m wrong.
And isn’t that what you want in any investment? Lots of upside without the risks that come from buying into sectors with inflated expectations.
And any further wildcards from the Middle East could see your energy stocks soaring.
At least give it some thought.