Oh my, check this out.
In last Saturday’s Profit Watch, I told you to watch oil in 2019.
This is due to environmental regulations due to come into effect in January 2020.
Now we have evidence that some very big players are hunting the same move.
The Financial Times reports that a London hedge fund is looking to raise US$1 billion to create a ‘hedging’ basket for shippers and airlines for the expected squeeze in the energy market.
You need to be following this story.
Today’s Profit Watch explains why…
A group called Enerjen Capital is the one chasing the billion dollars.
Presumably, it’s going to buy up crude oil or petroleum product futures this year, but for delivery over 2020 and 2021.
This would lock in — for the company — the relative low prices after the oil crash late last year.
The potential upside from these new shipping regulations could be a bonanza.
That’s because these new rules are going to stress the global refining industries’ ability to supply the world with diesel and other ‘middle distillates’.
These are used in everything from farming and mining to shipping and air travel.
A similar thing happened in 2008 when oil nearly hit US$150 a barrel.
All the fundamentals are in place for a price spike in late 2019.
However, a word of caution: We might have a few bumps left on the way there.
We need look no further than the usual suspect: Donald Trump…
Oil: A bumpy ride coming
This man will not leave the world to settle for a moment.
We now have reason to be positive regarding the current US-China trade spat.
Markets are tentatively pricing this in right now. The Chinese have made some conciliatory gestures.
They’ve permitted the import of US rice. They’re buying US crude and soybeans again.
Perhaps the first quarter of 2019 is when we finally get to put all this behind us.
Unfortunately, Donald Trump has now partially shut down the US government.
As of 22 December, 800,000 US federal workers are on leave or working for no pay.
This injects another level of uncertainty into the US market. Now, this has happened before, and historically the markets have got along fine.
However, energy expert Philip Verleger just warned air travel could be totally grounded in the US if this shutdown continues — as Trump threatens to continue it until he gets the funding for his wall.
Oil demand could take a short-term hit if this was to happen. Don’t forget all those federal employees are now hoarding every penny they have as their income is cut off.
Naturally, it might be all over tomorrow, too. We can only take this day by day.
All I’m saying is that investing around oil makes for a very volatile ride.
Energy firms are still grappling with the crash from nearly US$80 to close to US$40 late last year.
Occidental Petroleum Corporation [NYSE:OXY] is a notable US energy firm worth keeping an eye on.
In its latest investor update, it said it would cut its capital expenditure down from the US$5 billion it spent last year if WTI (West Texas Intermediate) continues to average around US$50 a barrel.
Presumably, other frackers will follow this lead.
Why do we care?
The price spike due around 2020
This severe and recent dip in oil could cause US production growth to come in lower than expected in 2019. That would exacerbate the potential for a price spike later in the year.
A lot of the growth in oil production is from the shale fields of the US.
There’s a further problem with this that few understand. US shale is a fine oil for producing lots of gasoline.
But it’s not so good for diesel — where the big surge in demand is predicted.
There’s a mismatch here.
Now, a year is a long time in the market. Oil may swing all over the place this year.
That’s why I emphasise you need to size any position here modestly so you can handle the volatility, and hang on to 2020.
Some of the market action around 2008 is a handy guide here. There were plenty of traders that were expecting a big fall in the US market as early as 2005 back then.
It’s one thing to see trouble coming. It’s another to be able to time it. There are always countermoves that can work against you.
For example, in 2008, the Dow Jones rallied from January to May. Then the big decline began.
So watch oil — but expect a bumpy ride.
As resources veteran Rick Rule often says, just because something seems inevitable does not mean it’s always imminent.