Boof! Energy player Santos just took one to the jaw. It’s announced a billion dollar impairment charge. Oil ain’t oil anymore!
Does it all sound familiar? It should because this follows on from Woodside taking a left hook as well the other week.
I doubt Santos will fall that heavily. COVID-19 already smashed the stock back in February. This outcome is built into the price.
You don’t get two cracks at that kind of move.
But it’s typical of why energy stocks aren’t really a sandbox you want to be playing in right now, absent a big catalyst like an imminent exploration campaign. There isn’t a big scope for good news to come your way.
Looking Ahead for Oil and Energy…
This is unlikely to change anytime soon, either. The first problem is that COVID-19 is suppressing demand to a big degree.
The Sydney Morning Herald reported the other day that Aussie LNG ships are cruising around the ocean with no great rush. Buyers are delaying deliveries.
Thus continues the bizarre situation where the Australian domestic economy pays an inflated price for gas when elsewhere around the world it’s as cheap as it has been in years.
What’s the solution? If you ask BHP, a bit more Bass Strait exploration is on the agenda.
The Australian reported earlier this month that the company is going to fund the early stages of a new exploration campaign.
That’s a signal that their analysis at least views the forecasted gas shortage due in a year or two as genuine. But you do have to be careful when you look out past 12 months.
I have a folder about an inch thick of articles from 2017–18 showing all the big energy companies here expecting a supply shortage and high gas prices.
You only need to glance back at the opening line of today’s Profit Watch to see they got this wrong.
Perhaps that’s unfair. Nobody could have seen a global pandemic coming two years before it happened.
The broader point is that the world is like that. It doesn’t sit still. What can seem certain today won’t necessarily be the same tomorrow or next week.
It gets more complicated for fossil fuel industries than even the basic supply and demand equation.
Then we have the permanent vexing question of who is going to win the White House in November?
Joe Biden is staking his claim with a big climate package that will naturally shift the US away from fossil fuels and toward renewables.
Donald Trump is a coal and oil man, and is prepared to roll back regulations to help them continue as viable industries.
The mainstream polls put Trump well behind. But, as we know, they underestimated him the first time too.
I’m getting very divergent views here from analysts I know in the US as well.
Some of them think Trump’s low tax; pro business stance is a winner. Others point to the COVID-19 disaster as a giant hole that he can’t get out of.
I don’t think we’re going to get a clear read on this. Whether it’s 50/50 or much more tilted either way, I can’t say.
I do think a Biden win — or the expectation of this until the final result is clear — sends US stocks lower because of his stated tax policy.
But we can’t discount the bigger geopolitical picture either. Remember the trade war?
For two years we heard little else except what Beijing and Washington demanded and conceded to each other.
COVID-19 took the conversation away and then some. And yet the issues are not resolved any less.
They’re more inflamed than they were. A shrinking economic pie makes a dangerous situation worse.
Many commentators point out that governments will pick a fight when an economy is in the doldrums.
It takes the focus away from the domestic scene and justifies government deficits and intervention in the economy on national security grounds.
This is not a trend we would want to see flourish.
But I fear we haven’t heard the last of tension in the South China Sea and further resistance to China’s One Belt, One Road projects in Africa and Central Asia.
The trade war is devolving into a new Cold War.
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