Ignore The Pullbacks In Oil Prices

Oil has been hovering nearer to $65 for the past several weeks, after reaching above $75 during early July. But the few things that have been stalling oil’s progress over the last two months seem to me to be fleeting, with lots of indications that the more substantive fundamentals continue to strengthen. In all ways, and despite the stock market’s lofty heights, this seems to be a moment to invest for much higher oil prices to come.

Let’s look at the current roadblocks that seem to be detouring oil’s steady climb higher. The first, and biggest seem to me to be the continuing Trump trade war, which has put a steady price decline into many commodities, most starkly with grains like Soybeans:

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Tariffs naturally depress commodity prices as higher taxes tend to depress demand. Although the targets of tariffs has been more focused towards grains and base metals, oil has not been isolated completely from their effects.

But this seems a temporary obstacle, as we’ve seen a new NAFTA agreement between the US and Mexico emerge in recent days. The hope is for Canada to agree to a renegotiation and a new agreement as well, and ultimately for China to start to consider some trade concessions. Whether this gives Trump an undeserved victory for small differences in these agreements or not, it seems clear that the Trade war does not benefit anyone, needs to be resolved sooner rather than later and will be abandoned at some point.

The positives for oil to continue to climb higher, however, are hardly temporary. Of course we have the continuing draining of global stockpiles, with global demand still racing far ahead of current supply – and that disconnect is likely to get much worse in what remains of 2018, with increased sanctions against Iran, continuing infrastructure shortfalls in the Permian and the complete collapse of Venezuela’s oil economy.

But the move by the Saudis to ‘cancel’ their IPO of their state-run oil company may be the most bullish yet. The Saudis have been the driving force behind an historic arrangement between OPEC members and the Russians to limit production coming to market for the past two years. Only a very successful monetization of Saudi Aramco will deliver the capital to complete Saudi Vision 2030, with new infrastructure, new social guidelines, new educational opportunities and more progressive religious standards.

That’s some big stakes we’re talking about. So big, that the Saudis wouldn’t risk their IPO coming to market if there’s any hint of doubt about a very, very big – like $2 trillion big – kind of success.

Don’t read too much into the disagreement that’s supposedly forming between King Salman and his son, Prince Mohammed bin Salman over the IPO and Vision 2030. I see that as a shrewd move by the King to dispel the pressure of opposing voices in the kingdom and the chirping of US and UK investment bankers and exchanges surrounding the deal. The bottom line, as I see it, is that $100 oil – and the prospect of sustainable $100 oil prices – will quickly push the IPO back to the front burner, with the complete support of King Salman.

And that’s where were undoubtedly headed. We’re seeing temporary obstacles to oil’s upwards march and far more sustainable, fundamental reasons for it to ultimately continue – to $100 and above.

Which means to me that now is a great time for continued retrenchment into energy stocks.