The entire local financial media put your attention on the Reserve Bank of Australia yesterday.
Warren Buffett’s appearance on CNBC this week is a better use of your time. Today’s Profit Watch will show you why.
Mr Buffett often pops up in the news. That’s even more so lately because his company, Berkshire Hathaway, just held its massive annual general meeting. These meetings fill a sports stadium full of people.
I’m bringing him to your attention for another reason. It’s Buffett’s decision to provide US$10 billion in capital to energy firm Occidental Petroleum to help fund its potential takeover of Anadarko Petroleum.
You might have heard about the conditions around the deal or the fact that Occidental trumped a previous bid from Chevron.
But here’s the crux of the matter for me.
On 6 May, Buffett said on CNBC:
‘It’s a bet on oil prices over the long term, more than anything else… Oil prices will determine if any oil stock is a good investment over time.’
Does that stick out to you? Arguably the world’s greatest investor of all time is suggesting oil will go up…
The sector never before as cheap as this
Buffett’s also prepared to risk a significant chunk of money that he’s right about this.
It’s also interesting for another reason. Buffett has let it be known, many times, that Berkshire struggles to find ‘value’ opportunities in a frothy US stock market.
That’s a problem when you have US$100 million coming in every working day and have to do something with it.
But there is one sector of the market that is decidedly dirt cheap — and I’m certain Buffett knows it.
It’s commodity stocks.
Two researchers recently went to the trouble to chart the value of US commodity stocks versus the Dow Jones average back to 1937.
The Great Mining Collision
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Here’s what they just found out: Natural resource shares have never been more depressed relative to the broad market.
Take a look at the chart they used to highlight this…
Notice the huge spikes that came after the previous lows around 1970 and 2000.
It’s no surprise that a classic value investor like Buffett is hunting around this area of the market. This is where there’s potential for big upside.
What? Isn’t oil a dastardly business that Australian and US millennials despise?
Maybe so. But Buffett might have his eye on the bulging wave of emerging market consumers rising in India, Africa and Southeast Asia.
A clue from a separate industry
You might be surprised to know that energy consumption increased 2.3% last year — the biggest increase in 10 years, and way over the 1.4% average of the last five years.
We can see the effect of this another way via this week’s Economist. It’s to do with pork and beef.
The hottest float on Wall Street right now is Beyond Meat. It produces protein from plants — and is up 220% since it floated last week.
Its products must be of great appeal to the tide of vegans sweeping markets like the US and Australia.
Veganism may be a Western trend, but it is not a global trend.
The Economist ran the numbers. In the decade to 2017, meat and fresh dairy consumption rose 1.9% and 2.1% a year respectively.
The global number of ruminant livestock is expected to grow from 4.1 billion to 5.8 billion out to 2050.
This is because populations in emerging markets will consume more as they get wealthier.
It holds that these markets are going to become more energy-intensive, too, as they urbanise and consume more.
In terms of energy, renewables will surely meet some of this demand. But based on current trends, there’s no way oil is going to be displaced in the short term.
Even Tesla recently warned about the critical shortage of minerals needed for lithium batteries from underinvestment in the mining sector.
All this points to the world setting up for a difficult transition period. Banks and the capital markets are under pressure to stop financing fossil fuel companies.
But the world still consumes 100 million barrels of oil a day…and that number is only going higher.
At the same time, the known reserves of oil keep declining.
The CEO of oil services firm Schlumberger recently said that the four years of record-low investment outside of OPEC is starting to show up in declining production.
The stage is set for a boom in the price of oil as this wave of emerging market demand crunches against the dwindling supply. There are multiple wild cards that could kick it even higher.
Practically none of this is priced into any oil stock. No wonder Buffett is prepared to put US$10 billion on the line. The upside comes free.
There’s an oil bull market brewing. Get on board for the ride here.
 ‘The Bell Has Been Rung,’ First Quarter 2019, Goehring & Rozencwajg, May 2019.