The market is adjusting and settling in. It seems to like the view from way up there, and why not. It has been a while since the market could rest somewhat peacefully, but keep one eye open …
The world is changing, and changing fast. Just five years ago, if you had thrown out that the US was on its way to becoming one of the big three oil exporters in the world, more than a few folks would have suggested you get some coffee. You see, in 2008, the US ranked 11th with oil exports just under 2 million barrels per day. Today, five years later, the US is ranked 3rd with exports totaling just over 9 million bpd, which means it is just shy of the 9.3 million the Saudis produce. This unto itself is fascinating, but it is the impact of this reality that speaks to the market.
- The WTI once again is establishing itself as the global benchmark for oil.
- The WTI/Brent oil spread fell below $8 for the first time in two years as the US is reestablishing itself not only as a major oil consumer but also as major world oil producer.
Another impact that affects the market is part of the transformation I mentioned a moment ago. The US climb to number three in the world ranking is not at the expense of other oil producers; it is in addition to them. The US is now adding some 7 million more barrels of oil per day to the oil market. Now, factor in the increases in oil production from Russia and the African countries that are starting to exploit their oil reserves (I will get to this in a moment), and you have some big pressure on inventories.
True, according to the numbers, the difference in five years is only 3 million barrels, but one has to consider two things when looking at this number. First, since 2008, OPEC has scaled back production to match demand and second, the US is not pulling back, as there is money to be made in black gold.
So, for market players, how do you play oil (or the energy sector for that matter) over the next year or two? Before you answer, consider as well that Tesla Motors just turned a profit for the first time ever in its 10-year history. And what does Tesla Motors do?
- Tesla Motors, Inc. designs, develops, manufactures, and sells electric vehicles and electric vehicle powertrain components. The company also provides services for the development of electric powertrain systems and components, and sells electric powertrain components to other automotive manufacturers.
Oh, but there is more. Consider as well that the US and other countries are increasing demand for the ancillary benefit of the oil boom in the US – natural gas. The US is on the verge of becoming a net exporter of natural gas, as demand around the globe is heating up (no pun intended).
- Natural gas, the worst-performing and most volatile commodity of the past decade amid a glut in supply, is replacing gold as a haven for commodity investors as the metal slumps.
The above is an interesting take, and I am not surprised an analyst thinks this, as I have long argued that the “idea” of gold as a safe haven investment is archaic. Interesting as it might be, this is not the point. My point is that natural gas is fast becoming a big player in the energy and commodity sectors.
Now, taking this back a bit to when I mentioned Africa, consider the following in terms of both supply and demand.
- After years of headlines about Africa’s poverty, its emerging middle class is now grabbing attention as a driver of growth and democracy and an expanding pool of consumers for market-hungry retailers. Consumer demand is a motor of Africa’s economic and investment surge, and analysts see middle class buyers with swelling disposable income as fuelling this boom from South Africa to Nigeria and Kenya.
Okay, so oil production is up globally, the US will produce even more oil, electric cars are coming fast, as the other auto biggies ramp up to compete with Tesla, countries are switching to natural gas from oil, and the emerging economies in Africa are adding more oil to the world market, as well as consuming more it.
Now, answer the question I asked – How do you play oil (or the energy sector for that matter) over the next year or two?
As usual, I found another contradiction emanating from the world of really smart people, people who study things like economics and finance. I constantly bring these contrary points up because I want to instill in anyone who cares to learn the idea that big titles, letters after names, and long histories do not an infallible expert make. Check this out.
- Federal Reserve Chairman Ben Bernanke said on Friday that the shadow banking system continued to pose a threat to financial stability, and that bank funding markets might still not be able to cope with a major default.
- The regulatory posture in the U.S. and in Europe is unequivocal: They want to transfer risk to the shadow-banking system,” said Roy Smith, a finance professor at New York University’s Stern School of Business and former Goldman Sachs Group Inc. partner.
So, what do you make of that? And just to be helpful here, the shadow banking system is the arbitrage, trading industry that commercial banks (BofA, JP Morgan, etc.) are exiting because of the Dodd-Frank regulations. Again, we are talking about trading debt, good and bad.
- Hedge funds using debt-trading strategies honed on Wall Street are expanding at a record pace as they profit from risks big banks are no longer taking.
Finally, one last though to consider, since I have been writing about the negligent threats to market momentum …
- The yen weakened past 100 per dollar, giving Japanese Prime Minister Shinzo Abe a symbolic victory for his easy money policies, with markets bracing for further declines in the currency that could raise tensions with trading partners.
Trade in the day; Invest in your life …
