No one was expecting much from last week’s EU summit.
It was the 19th of its kind since the GFC began.
And history has taught us that these shindigs are only good for producing promises to make promises to think about fixing things sometime in the future.
But some progress was made, and the markets had an impressive rally. Commodities surged. Copper jumped 4.1%, gold was up 2.9%, and silver was up 4.2%.
The one that really stood out was oil.
Brent Crude oil surged 6.2% in a few hours.
That’s a huge jump. Brent finished the week up 7.5% in all, and has held onto most of this so far this week.
Was this huge weekly surge all about hope for a way through the European debt crisis? It seems hard to believe.
What about the US and EU sanctions on Iranian oil starting this week?
The oil market has known this for months, so surely that was priced in?
Then sure enough – the plot thickened.
Déjà Vu in the Oil Market
We are now hearing stories that Iran is planning to close the Strait of Hormuz. This is the world’s busiest oil shipping super-highway – carrying about a third of the world’s seaborne oil trade daily. Blocking it would be like blocking the door to the bar at the MCG on Grand Final day. Anyone else selling beer and pies could charge what they wanted.
So blocking the Strait of Hormuz would send oil prices soaring.
Anyone having déjà vu yet?
Haven’t we watched this episode before?
Back in January, Iran was threatening to do exactly same thing, but never did.
But now it is back on the menu again. The Iranian parliament needs to vote on this first, so watch out for that. If it looks like it will go ahead, then the oil price could spike as global oil supplies are hamstrung.
The market certainly doesn’t seem to be panicking yet – it’s seen this all before. Not just in January, but many times over the last few decades. The Middle East has held the US and the global economy to ransom over its oil many times in the past.
But the US has had enough of this, and is tired of shaping its national security and defence policies around securing foreign oil.
It’s a popular belief that that oil from the Persian Gulf states make up most of the oil the US imports. This is not true anymore.
The US has slashed its dependence on oil imports from the Persian Gulf. Gulf oil makes up just 15% of US oil imports.
Rather than fight wars to secure Middle-Eastern oil, the US has been importing more from countries closer to home: Canada, Mexico and Venezuela.
That’s not all. The same market conditions that drove this push to ‘buy local’ have also supported a renaissance in the US oil industry: Shale.
The Huge Oil and Gas Energy Shift in the USA
The shale sector has been a game-changer of incredible proportions.
Higher commodity prices – and improvements in technology – enabled the energy industry to perfect the new art of extracting oil and gas from shale formations, to spectacular success.
The US now produces so much ‘shale gas‘ that the US gas price has fallen 80%. This is great for the consumer, and the struggling US economy. A revitalised industry creates hundreds of thousands of jobs, and a new source of cheap energy creates more competitive industry. It will take time, but the flow-through effects on the US economy will be massive.
And thanks to the Bakken shale formation, the little state of North Dakota is now producing more oil than Alaska.
Some analysts reckon that this is just the start. The growing success of ‘shale oil’ could see the US wean itself off Middle-Eastern oil over the next 20 years, and maybe even turn the US into an oil exporter in that time! This all depends on the rate of success of an industry still in its infancy, so time will tell.
For example, higher oil prices, higher volatility and growing sovereign risk in the oil commodity market, created market conditions that bred the technological changes that drive the shale sector today.
Commodity markets and technology have a ‘predator-prey’ relationship – in which each forces the other to continually evolve.
Back at the start of the 20th Century, Standard Oil refined crude oil chiefly to produce kerosene for lamps to light homes and streets. Business was good.
Then one Mr Edison came in with a new technology – the electric lamp. It penetrated the lighting market like the iPhone invaded the mobile phone market of today, pushing out the kerosene lamp industry – the Blackberry of its time.
Oil prices fell, and Standard Oil was in trouble. But in answer to its prayers, a new technology evolved that needed cheap fuel – the motor car. And the rest is history.
Picking how technological changes will interact with commodity markets gives investors the big picture opportunities. I’m talking about the investing trends that last a decade, and create fortunes like the Rockefellers.
Profit From Long Term Trends
I’ve been focusing on identifying these decade-long investing opportunities for Diggers and Drillers readers this year.
I’ve recently tipped stocks involved in graphite and lithium, both used for lithium ion batteries in hybrid and electric cars. Now that the Toyota Prius is the world’s third best-selling car, we are really starting to see demand for lithium ion batteries take off. In the worst market for years, these two stock tips have given readers gains of 133% in 2 months, and 12% in 2 weeks respectively.
These Shale Oil Stocks Are Up
And going back to shale oil, I tipped two stocks earlier this year, which are up 25% and 13%; in the same time the rest of the market crashed.
One is a growing producer. The other is exploring. In fact it starts ‘fracking’ shortly – which I believe is why the price has just started moving this week. With a good chance of a higher oil price, and on-the-ground exploration commencing, the next few months should be very interesting for this stock.
Dr. Alex Cowie
Editor, Diggers & Drillers