In a new book I’m reading at the moment, which is totally brilliant and which I’ll absolutely review for you soon, there is a great line.
It’s about how economists’ models don’t account for people, emotions, or as the author puts it, for the possibility that there is a “sorehead colonel in an oil country deciding that Allah wished the Prime Minister to meet with one 9mm bullet”.
That’s why the oil market has always been a mysterious beast.
Supply and demand is all well and good, until a tanker is attacked in the critical Straits of Hormuz, a narrow waterway between Iran and the UAE.
Or until concerns around the vaccine suddenly grip the hearts of market participants suddenly, rather than slowly.
In the last couple of weeks, I was starting to see hundred-dollar oil predictions everywhere.
If there’s one thing to expect in this ultimate commodity, it’s a rejection of consensus.
No cure for high oil prices and all that.
The huge drop in oil prices (big red bar below) on Thursday was attributed to “demand concerns”.
But in fact, it probably just revealed the extent to which speculators had re-joined the market.
The prospects for the continued re-opening of global economies and the consequent rise in demand for oil to power our staycations and vacations did not change by 9.5% on Thursday 18 March.
I recently saw an age-old interview with Warren Buffett, as a very young man, explaining that while markets are forward looking, they often make mistakes.
He said that a downward move in stocks at the time was more likely a correction of a previously incorrect belief about the future, rather than a new correct prediction.
I like that analogy.
I continue to think that the shock to the supply side of the oil market was as significant as to the demand side, and the demand side will return faster (though to what level I do not know).
This realisation accounts for much of the recent strength.
But sharks smell blood in the water, and momentum is a powerful force in investing these days.
Reflation and rotation drew investors towards the oil and gas sector, and higher prices confirmed what clever chaps and gals they were for doing so.
Algorithms pick up on momentum after a while, exacerbating it.
I doubt many of the hardened energy trading desks woke up on Thursday morning and thought heck, oil is worth 9% less today than it was when I went to bed last night.
But a few momentum traders, algos and the rest were punished for taking the re-opening narrative too far and pushing oil prices up too fast.
If there is an error here though, it is one of speed, not direction.
I continue to believe that oil and gas stocks offer incredible value compared to many other parts of the market.
And it is important to think about speed and direction separately.
Take electric vehicle (EV) stocks for example.
Investors are dead right to fixate on their potential.
They are dead right that 2020 was a great year to get thoroughly stuck into EV stocks, because the world has changed in ways that have benefitted electric vehicle sales greatly.
They are absolutely right about the direction of travel for the EV sector.
But if they have made an error, as every brilliant analyst in the market keeps pointing out as if they are the first, it is only one of speed.
The tech investors of 1999 were right in every way but one. And it was a crucial one. But we mustn’t be too harsh.
Every single indicator in the auto market says EVs are the future.
The action from incumbents in the last six months has been extraordinary, and so the disparity between disrupters and disrupted is closing.
VW is surging, Volvo is going electric by 2030. BMW the same, Geely in China too. Audi, Citroen, Peugeot, Vauxhall… the list goes on. Legacy automakers are churning out new models at an incredible rate.
Now that I’ve started looking, I see hybrids and plug-in hybrid EVs (PHEVs) and pure EVs everywhere on the streets.
In both the energy and the travel space, I remain cheerfully attached to the idea that pairing old and new is a pretty good way to go.
The old guard like VW, Peugeot, Shell and Repsol offer current earnings, dividends, and cheap valuations.
The new kids on the block offer the chance of incredible growth and the capital gains to match, but with much lower certainty.
I’ve written a lot about bond yields recently.
The old guard will perform better as bond yields rise, as what a company earns this year becomes more relevant than what it might earn in ten years.
But if central banks manage to walk the tightrope and keep rates close to zero without triggering inflation, then the new boys will have cheap money to burn, and they can fuel their ambitious growth strategies.
Both offer a very interesting mix of short-term potential and long-term potential, and in a future as uncertain as the one we face today, I wonder why most people are determined to sit in one camp and one camp only.
Before I go, I’d like to quote an article about a very responsible and impressive central bank.
It reads like how I and many others wish the reports of our own central bank would read, or those of the Federal Reserve in the US:
The Bank of ——— unexpectedly increased interest rates for the first time since 2018 and warned of further hikes after inflation accelerated faster than expected.
The benchmark rate was raised 25 basis points to 4.5% on Friday. Just three analysts in a Bloomberg survey of 41 economists forecast the move [classic], with the rest expecting no change. The [currency] climbed and 10-year bond yields rose to their highest level in a year.
The central bank “holds open the prospect of further increases in the key rate at its upcoming meetings,” according to a statement published on its website. Inflation is running above forecast and is expected to return close to the target of 4% in the first half of 2022, it said.
Can anyone guess which country it refers to?
Its index has smashed the FTSE 100 since last March, has kept pace with Amazon and Netflix, and isn’t too unrelated to the topic of today’s article…
If you can guess which country is, let me know at [email protected].
Otherwise, have a great week everyone!
Editor, UK Uncensored
PS Want to know what the best performing investment director at Southbank is looking at now? Click here…