How afraid should we be? That’s the only question you’re left with after reading Ambrose Evans-Pritchard last week.
Don’t know the name? He’s a widely read financial commentator…and he’s now warning about a potential oil price crunch.
And by that, he means the price spiking uncomfortably high…for all of us.
If you’ve been with me for some time, this will not be news to you. I’ve pegged oil as a market to watch for about a year now. The response has largely been one of staggering, total indifference.
Even the financial markets are unconcerned. If you were to look out of the futures curve for the next 12 months, you won’t see any severe worry about this built into the price.
That seems strange. The new shipping regulations due in 2020 could have a much bigger impact than the current sanctions on Iran.
And these new rules could come to pass when the global spare capacity is close to zero.
That doesn’t mean it’s all bad news…
This is why shares can spike in a short space of time
These are the situations you should dream about as a speculator. It’s when you get a dramatic rerating in price that it can send share prices up way higher in a short space of time.
That’s true of any commodity. This year, it just so happens that it’s more likely in the energy sector than anywhere else.
For example, if oil goes from US$50 to US$100, the share market will rerate the new earnings potential of oil stocks accordingly.
There are no guarantees, of course. But it’s like a hand of poker. You know your odds of making money are a lot better when you hold two aces instead of a random seven and three. That’s why I like this stock so much.
And even if you won’t touch an oil share, you need to be following this story. It could disrupt the entire market narrative — and the value of US and Aussie stocks — should oil erupt.
Because…what do we see happening right now? The US stock market has floated higher into new all-time highs based off solid earnings and the assumption that interest rates are on hold.
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James Mackintosh at The Wall Street Journal says Wall Street thinks it’s in a ‘Goldilocks’ place.
That’s where earnings are enough to prop up the stock market but the economy is not so hot to induce the Fed to try and cool it down by raising interest rates.
The market’s expectations around the outlook for inflation are a big part of this. Last year, it was expected to heat up. The cooling global economy has changed all that.
An oil price spike would change this dynamic…and likely lower share markets. Certainly, the uncertainty would rattle the indexes for a while.
We can be even more specific. If you happen to own Flight Centre Travel Group [ASX:FLT], for example, you might be a touch more worried about the outlook…
Be wary of any stock heavily exposed here
This stock took a bad tumble last week when it revised down its earnings forecast from its previous estimate. Flight Centre’s Australian division is currently proving problematic but the US and UK divisions are going okay.
Flight Centre has proved a durable and profitable business for a long time now. Perhaps this short-term weakness is a buying opportunity?
I can’t predict the future. But if I’m right about oil going up, that’s going to increase the cost of jet fuel for airlines.
That will flow back to ticket prices if sustained. That could further crimp Flight Centre’s customer base.
That means my bias is to avoid travel agents and airlines and any sector vulnerable to shift here. Only hindsight will reveal whether this is the right call or not.
I still don’t think there’s any more important trend to follow for the rest of 2019 than oil. It’s not just about potentially making money from strategic speculations. There are defensive moves you might be forced to consider to protect the value of your portfolio.
If we cycle back to where we began today, it was Ambrose Evans-Pritchard. He puts part of the blame for the current oil market tightness on Donald Trump.
That’s because of his hard line against Iran currently. Evans-Pritchard calls these latest sanctions the biggest gamble of Trump’s presidency. I suspect he is right about that.
Trump’s a gambler. Just remember it’s your portfolio at risk on the table if the hand he is playing fails.