I don’t see our car all week. I have no need for it.
My wife uses it to get to work some 20 miles away.
But the only miles I do are on foot for the school run. Oh, and those that my fingers cover as I tap away on this keyboard from home. 😉
Come the weekend, though, it’s taxi time.
Most Saturdays I take my son to football.
And my daughter for swimming lessons. Both short journeys.
Then perhaps we’ll head over to see family for Sunday lunch, an 80-mile round trip.
Pain at the pump!
And do you know the thing I hate most about the weekend?
That it’s always my turn to fill up the car!
And I’m not having a dig at my wife, by the way. She shells out more than enough during the week.
But by the time I get hold of the keys, the tank is usually empty.
As soon as I pull out of the driveway, off goes the beeper to tell me to fill up.
And it’s not cheap is it?
We don’t have a flashy car. Just a modest family estate.
But even so, it costs the best part of £80 to fill the tank.
(I always cringe at the thought of what Range Rover owners are putting in each time!)
Anyway, we’d better get used to this pain at the pump.
It looks like fuel prices aren’t heading lower any time soon.
In fact, from what I’ve been reading this week, they could be moving a lot higher in the months ahead.
That’d be bad news for our wallets.
And it could be a nightmare for our investments too, as we’ll see in a moment.
Supply, demand and geopolitics
Here I am moaning about fuel prices and that’s with the price of oil at a mere $68 per barrel.
That’s already a 43% increase on what it was a year ago.
But it could be another 17% higher in the next 6 months.
And according to one oil analyst I was reading earlier in the week, it could soon be trading at more than four times the current price.
We’ll get to that in a minute. But let’s look at what’s been going on recently.
Oil’s been surging in 2018 for a few reasons.
Part of it’s to do with restrictions on supply from places like Venezuela where a financial crisis has hit production.
And Opec made a deal in 2016 with other major oil producers including Russia to limit supply which is still ongoing.
That’s the supply side. Then we’ve got increasing demand…
Strong global economic growth has led to a thirst for oil. That increased demand in conjunction with restricted supply equals prising prices.
But it’s not just about supply and demand.
There’s also been plenty of geopolitical tension in the mix.
And as always, that adds a premium to the oil price.
There was the Syrian chemical attack business and the Western missile attack on Damascus in response.
That crisis alone moved the price up 11% from around $60 to $67 in a few days.
But there’s more to it than that.
After all, Syria’s not a major oil producer, as Bloomberg’s chart shows:
So, Syria’s output is hardly important to the global oil supply.
It’s just the thought of escalating conflict in the region that added the political risk premium to the oil price.
More interestingly, the price has stayed up there. And it’s likely to stay up until anxieties disappear.
Especially when you consider the other forces at work…
Saudis aiming for $80 oil… possibly much more
The Saudi government’s intent on forcing the price of oil towards $80.
And that’s as a minimum.
According to Bloomberg that’s the price the Saudis need to sell their major export for “to pay for the government’s crowded policy agenda and support the valuation of state energy giant Aramco before an initial public offering.”
Saudi Aramco is the state-owned oil and gas producer, worth between $2 trillion and $10 trillion.
But they’re selling off a 5% stake in the company to raise cash for their coffers.
They’ve let it be known that $80 is a level they’d be comfortable at.
But why stop there?
The higher the oil price, the more valuable Aramco becomes.
So, to my mind, it would make sense that the Saudi’s will try to pump up the oil price even more – perhaps much higher than the $80 figure.
How can it achieve that?
Pump it up
Well, they can continue to restrict supply. As demand for oil continues to rise, keeping the taps closed will force the price up.
And according to Nadeem Walayat at The Market Oracle, there could be more to it:
“The announcement may be for $80 however the objective is probably $100 as the difference between $60 and $100 could amount to as much as $1 trillion difference in ARAMCO’s IPO valuation.
“So expect the Saudi’s to continue trying to manipulate the oil price higher both through Saudi oil supply and through their proxy wars in Syria and Yemen, which includes false flag operations such as the recent supposed missile attack on Riyadh, all of which are aimed towards boosting the oil price ahead of the ARAMCO IPO.”
The point is, if there is tension in the Middle East, there’s going to be upwards pressure on the oil price.
And with Donald Trump threatening to kill the “Iran nuclear deal” in the next 10 days, there’s another boost coming…
That move will reinstate sanctions on Iran that will remove some 1 million barrels of oil a day to global supply.
It’s another tailwind for the oil price…
What this means for your money
What happens with $100-oil?
Well, first it will accelerate the rate of inflation.
Central banks are already starting to raise interest rates to try to keep a lid on inflation.
But if a surge in the oil price was to lead to inflation getting out of control, central bankers may need to take more drastic steps… by raising rates faster than planned.
And one thing’s certain about that scenario: stock markets won’t like it one bit.
We’re already 9% down from the stock market’s January peak, looking at the S&P 500.
That’s ok. It’s just a correction (so far).
And as we’ve seen, there are still plenty of buyers ready to come in and pick up stocks when the market dips.
But I’m not sure investors will be so keen if interest rates start running away and the stock market suffers a more meaningful downdraft.
The complacency that we’ve seen for the last few years may evaporate, and real panic could set in…
And that’s when we could get a proper stock market crash.
Don’t forget also that if the oil price was to surge to triple-digit levels, it’s going to put a major damper on world economic growth.
That’s something else investors will be wary of – giving them another reason to take some money off the table and sending the market lower.
Which suggests to me that it’s not the right time to be all-in the stock market right now.
Perhaps it’s time to hold some cash looking to take advantage of a major sell-off and picking up some bargains.
That and picking up some ‘disaster insurance’ in the form of good old gold and silver…
They both tend to do well in times of high inflation and falling stock markets.
Are we heading for the “largest supply shock ever”?
By the way, bear in mind that an oil price of $80 is only a 17% increase from here. A $100 level would mean a 49% move.
That sounds a lot. But not really when you consider it’s only taken 9 months to rise 50% to where it is now.
Anything’s possible in times when all these forces come together.
But one guy I was reading about earlier in the week is sticking his neck out and calling for even higher prices.
OK, he’s not talking any time soon. But even so, it could have major implications for the way we should be investing our money.
Pierre Andurand is a well-known hedge fund manager, specialising in the oil sector. Marketwatch reports Andurand as saying:
“Worries over the electric-car revolution have kept a lid on investment in projects with long lead times. So paradoxically these peak demand fears might bring the largest supply shock ever… $300 oil in a few years is not impossible.”
Of course, Andurand is an oil guy. He wants a high oil price.
And he could be talking his book here.
Still, it caught my attention and made me wonder “what if?”
We’ll have to wait and see. But if it happens with any speed and the markets don’t have time to take it in their stride, it could be ugly.
In the meantime, as I fill up the car this weekend, I guess I should enjoy the fact that it ‘only’ costs me £80.
Fast forward a few months and I may well be paying £95… or £120.