By MoneyMorning.com.au
After we reversed out of our driveway yesterday morning and over our limelight shrub (again) we noticed we only had a quarter of a tank of petrol.
As we drove past a couple of service stations, something became obvious. Petrol was almost $1.60 per litre. “We’re not paying that!” We said to ourselves. So we let our V8 cough and splutter its way to the Money Morning office here in St Kilda.
Yes – it’s getting too costly to travel. However, if history is anything to go by, high petrol prices could be giving you an important investment signal…
Oil Price to Fall?
Back in June 2008, petrol prices nudged $1.60 a litre in Melbourne before the crude oil price fell 71.73% from its peak. The knock-on effect didn’t take long. By November, petrol prices had dropped to $1.15.
But before you start watching the news every night for information on the oil price, know this…
The benchmark for Australian fuel prices is the Singaporean Tapis Crude Oil contract. And while the Tapis price is derived from the Brent Crude oil price, it’s always slightly higher because it includes the ‘cost of carry’. A fancy economic term that factors in the cost of storage and transport.
Currently, Tapis is trading at USD$133.80 per barrel, compared to Brent’s USD$124.24 per barrel.
So, let’s look at what happened last time petrol prices pushed above $1.50.
Between 29 May and 24 July 2008, the Melbourne petrol price was above $1.50. It peaked at 1.58 on 9 July.
Why the spike? Well, oil prices were high for several reasons: political risk, Middle East tension, terrorist risk and supply fears. Another reason was that investors were flocking to oil as a hedge against inflation and a weakening US dollar.
In fact, the US dollar Index was down 12% during this period… while the price of Brent crude was up 112%!
But not long after the oil price hit a high of $150.70 per barrel, it fell to $49.93 a barrel.
And it looks like the market is ready to fall again, with similar reasons as 2008 behind the fall.
You see, the dollar index is 4 % higher since November last year. As the US dollar gains some strength, the oil price will start to weaken.
And just as it warned 4 years ago, the Organisation of Petroleum Exporting Countries (OPEC) is worried about the impact of the higher oil price on developed economies.
Twice this year, OPEC has lowered its forecast for oil consumption. It dropped it to 88.76 million barrels per day (mbpd) in February. And less than a month later, it lowered it to 88.63 mbpd.
On top of that, OPEC reported non-OPEC members have increased production by 300,000 barrels a day. Meaning stockpiles are growing while use is declining.
The International Energy Agency is concerned the higher prices are already hurting developed economies. It said last week, ‘Demand growth will likely remain stunted by weaker economic prospects, the more so if prices stay high.’
Just like 2008, there’s some speculation at play. The Mexican standoff between Iran and the US is helping to sustain oil prices.
Even so, the current high petrol price could be your signal to get ready for a fall in oil prices. If we see a repeat of 2008, now could be the time to get ready for short selling crude oil.
Shae Smith
Editor, Money Weekend
The Most Important Story This Week…
Joseph Schumpeter, an Austrian economist once said: “Early in life I had three ambitions. I wanted to be the greatest economist in the world, the greatest horseman in Austria, and the best lover in Vienna. Well, I never became the greatest horseman in Austria.” His general fame in all areas has sadly fallen since his death in 1950. But his famous phrase lives on: “creative destruction”. His lesson was that at the edge of every economy are innovators ready to hijack the established way of doing things.
Today, with the headlines full of troubled news, it’s easy to forget these entrepreneurs are still there. These are the companies you want to discover. You can take a speculative position in them with the hope of making ten times (or more) your money. But which industry now? Maybe one of the oldest of them all – manufacturing. This story is not only fascinating but could be a trend to bet big on for the next decade, as it says in 3D Printing: How “Desktop Factories” Will Create the Next $1 Trillion Industry.
Other Highlights This Week…
Kris Sayce on Investing 2012: Property, Dividends and Warren Buffett: “Warren Buffett – the world’s greatest investor – wouldn’t be half the investor if it wasn’t for a quirk of fate. Until the start of the credit boom, Buffett was an average-to-good businessman. When the boom kicked off in the 1970s, he was simply in the right place at the right time.”
Aaron Tyrrell on How to Invest in the Fastest-Growing Energy Business of the 21st Century – Before it’s Worth $96.4 Billion Dollars: “Because, as you’ll soon see, this opportunity has nothing to do with buying the last of the beat-down uranium stocks from the ‘Fukushima Fire Sale’… Giving terrorists access to nuclear fuel… Or subjecting anyone, anywhere, to the risk of radiation poisoning.”
Shae Smith on A Surprising Way to Offset Your Electricity Bill Thanks to the Mining Tax: “Because brown coal can blow up for no reason, most power stations are located within a very short transporting distance from the coal… some companies have developed ways to press out brown coal’s high moisture content – the main reason behind the spontaneous combustion. But most importantly, it makes coal safe to transport.”
Dr. Alex Cowie on Oil Getting Ready For Its Next Rally: “The ‘Iran situation’ has been the tipping point, sending oil prices soaring. Iran was threatening to close the busiest oil-shipping waterway in the world, which would send oil prices above $200. But the real reason prices has climbed is that sanctions on Iran are biting, and they are exporting less oil. This leaves a gap in the market – which no one else can fill.”
Shah Gilani on how “Jerry Maguire” Waves Goodbye to Goldman Sachs and its Muppets: “There are always sacred cows at every firm that aren’t messed with and are treated with white gloves. Why? Because they’re either too big to lose, too lucrative to mess with, or too high profile to ever get into a pissing match with. As far as the rest of the clients?”
To End the Week…
