Can we really play energy stocks? That has to be a critical contrarian question for anyone who likes to venture outside the investing square. And if you’re not a regular watcher of my Switzer program on the Sky News Money channel, then you’ve missed a vital interview.
But don’t worry, you can find it on my Switzer Daily website here [1], so there!
In case you missed it, oil went as low as $US26 a barrel or so last week but spiked to over $US32 a barrel after Mario Draghi reminded those seduced by doomsday merchants that you can ignore the clout of central banks. That could be a big mistake!
A guy who studies the energy market closely is Morgan’s Michael Knox and my colleague Paul Rickard interviewed him on my Switzer program last Monday, so let’s recap his main points.
Here they are:
- The stock market is being spooked by the same thing as the oil market — the Iranian new supply scare.
- Big oil companies have a big impact on the S&P500 index so it has slumped.
- Our market has played follow the leader.
- Last Monday was the first day sanctions were lifted off Iran and stock markets were nervous and they showed it!
- The players in the oil market weren’t sure how the supply of oil would be affected so “they got out the way” of it, as Knoxy put it. That means price and stocks down.
- Ironically, Knox says Iran is so behind the times after being out of the international oil supply game for years, it might increase world supply by about 0.3%!
- Against this, lower prices have meant US oil supply has fallen by a lot more than what Iran could increase supply by. Knox says US supply will fall by a lot more, as this year progresses.
- Happily, he says we’re moving into a seasonal spike in demand for oil as the northern hemisphere gets colder. In the US, they’re seeing historically significant snow drops!
- Knox says expect a spike in price and we did see that by week’s end, so he was on the money, even if it was partly because Mario Draghi talked about more Europe Central Bank (ECB) stimulus on the way.
- The consensus for West Texas crude is $US50 a barrel by year’s end. If the consensus is right, energy companies must be a screaming buy. If I were forced to buy such companies, then Oil Search and Woodside would be my most reliable recommendations. Santos could be the speculative spiker because it has been so trashed, but this isn’t for the faint-hearted or the risk-averse.
- Knox said in December that the officially calculated glut of supply of oil over demand was 3%. However, lower prices were clearing the market and he now predicts that higher prices could show up as early as April. He said this last Monday, so a part of the price rise that he expects may well have shown up already but we’re still a long way from $US50 a barrel. Go Knoxy!
- On China’s growth, Knox says China would be growing at 6.8% now, which ended up pretty well spot on, as numbers came out after the interview. However, he sees it falling to 6.3% by year’s end. He thinks the slow down in manufacturing is being offset by the expansion of the services section of the Chinese economy. In simple terms, he was telling us not to be too stressed about China — good on you again, Knoxy!
I advised late last year that we were going to need some surprisingly better economic readings from key economies such as the US, China and Europe and/or some great decisions from central banks as well as governments to turn sentiment towards the positive.
The week ahead delivers both data and decisions from the US Federal Reserve and the Japanese central bank, which could be confidence crushers or boosters. And as I pointed out on Saturday [2], there are 402 US companies producing their profit reports this week, which could, in total, confirm the reasons for recent stock market negativity or give lie to it.
As of last week of the small number of S&P 500 companies that have reported, over 70% have beaten on earnings, which is damn good. 53% fell short on revenues but 47% have done better than expected, which is OK. Thomson Reuters thinks earnings will decline by 4.3% and revenues will drop by 3.6%. However, if US companies do better, this could be a catalyst to rethink US shares going forward and, of course, vice versa.
Surprise, surprise, I’m rooting for the former, but for anyone wondering if they should take a contrarian punt on energy companies, you need to have at least a one year tolerance to volatility. However, if the news comes good this week on top of the oil price rally late last week, you could be pleasantly surprised, especially if Knoxy’s timetable for oil price increases are spot on.
I really hope I’m delivering the good oil on this subject!
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