Flicking through the website of Business Insider I came across an article about "7 key calls" French bank Societe Generale has produced as to what macro themes will drive markets and investment returns over the years ahead.
Call 1 was to get ready for fiscal policy easing across the G10 group of nations as global politics change on upcoming elections in the US and Europe.
So far, so good, then I got to Call 2.
It suggested commodities and commodity-linked currencies are about to have "another leg up". The Soc Gen analysts especially like oil's outlook as the "rebalancing process between supply and demand is gaining momentum".
So should you position your investments to benefit from a climbing oil price?
I think not, on the contrary, I expect oil prices will head downhill over at least the next five years.
Below, I have five warning signs that betting on oil prices sustainably rising may be a dummy call.
- US shale oil – new extraction technologies in the US have brought more supply onto the market and structurally changed the market's supply and demand dynamic. Due to the flood of new supply the US's competitors now have no strategy other than to fight for market share via increased supply and a lower oil price. The US also doesn't mind low oil prices, especially when the main losers from it are countries like Saudi Arabia, Iran and Russia.
- US dollar strength – If the US Fed is about to embark on its much anticipated cash rate hiking cycle this is a negative for oil prices that are set in US dollars. As the greenback strengthens almost every commodity priced in dollars will fall as it becomes more expensive to overseas buyers regardless of supply and demand dynamics.
- Even OPEC itself – is predicting falling demand over the medium term for fuel for motorized vehicle transportation across the primary gas-guzzling nations of the developed world. This due to more fuel efficient vehicles hitting the roads and electric vehicles becoming an increasingly greater part of the developed world's traffic mix. When OPEC itself expects some demand to fall over the medium term it might be time to worry about which direction prices are heading.
- Saudi Aramaco – Another giant red flag for the oil price outlook is the decision of the Saudis themselves to start flogging off their oil reserves while they can get what's available with prices near US$50 a barrel. Actions speak louder than words and The Saudi Aramco Company's IPO is expected to be the biggest of all time when it does float. The decision of the Saudi insiders to start trying to cash in now suggests the writing is on the wall for oil prices over the medium term.
- Renewable Energy – Some of the Saudi bearishness is driven by the global shift towards renewable resources including solar, wind and hydro-electric power. The cost-effective nature of nuclear power is also regaining popularity with global governments once again. Moreover, renewable power in general receives heavy government support which means this is a tide not for turning.
Given the fundamentals, I expect oil prices around US$25 a barrel in five years time which would mean a collapse in half from prices under US$50 at which Brent crude and WTI futures trade at now.
Of course there'll be some bounces on the way down, but I expect there'll be of the dead cat variety.
If this comes true Australian investors should avoid bargain-hunting in stocks like Woodside Petroleum Limited (ASX: WPL) and Oil Search Limited (ASX: OSH). It's also worth noting that more than a quarter of BHP Billiton Limited's (ASX: BHP) revenues are petroleum related.
While LNG-operators with big debt loads like Santos Ltd (ASX: STO) and Origin Energy Ltd (ASX: ORG) could be heading for big trouble down the line. I would not want to be holding them if oil really is in a long-term to terminal bear market.
