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Double, double, oil and the rouble

Unlike gold, oil is a useful commodity so a big slide in the global price is unfortunate for oil companies but should be beneficial for consumers and businesses generally.

The decision by OPEC not to reduce its daily output has been the catalyst but not the cause of world oil prices to plummet from the seemingly intractable US$100 per barrel mark.

The immediate impact on the Australian market has seen the share prices of our largest oil and gas producers take a backward step in the last three months.

But this presents an opportunity for investors with a long enough time frame to buy some high quality stocks at quite good prices.

True, companies like Santos will need to re-think its balance sheet and how it funds its current and future projects. STO may require some additional equity to rein in its gearing which has pushed above 45%.

Those fishing for bargains should look at Woodside Petroleum and Oil Search.

WPL is assertively looking for more oil and gas exploration opportunities around the world and could find the economics have changed for some of its potential targets. But fundamentally WPL is attractive not least for its dividend yield and the scale and capacity it has in LNG. A decision on a floating LNG project for Browse is inching forward and the Pluto project is now boosting the cash flow. Imagine if a solution for a second train could be found for Pluto…

Oil Search also looks good given its exposure to the now operational PNGLNG project run by Exxon Mobil. OSH has some very interesting projects underway in PNG including the Hides expansion and exposure to Elk-Antelope exploration.

BHP has been hit by the falling iron ore price as well as its oil and gas exposure. But around $30 per share, this is starting to look more palatable.

As I glance around the headlines on global commodities, it’s worth noting that the people in important roles inside the various industries are unequivocally positive on the long term.

  • BHP’s Andrew Harding is confident about the future of its coal business and believes some early green shoots are appearing.
  • HSBC’s global head of commodities trading was reported in the AFR this week with a positive message for Australian commodity businesses.
  • The IMF thinks lower oil prices will be positive for global GDP growth.

More generally, energy bills account for up to 15% of consumer spending including transport and household use so a few extra dollars in the pocket each week doesn’t go unnoticed. I doubt retailers will hold their breath heading into Christmas but there will be questions if petrol prices don’t realistically reflect what the nightly television news is reporting.

It is fascinating to see the effects of the US shale boom finally appearing in a global context. It has added approximately 1 million barrels of oil per day to global supply and that is significant. It will continue to grow making the US far less reliant on foreign oil and indeed, the US is already a net exporter for the first time in many years.

The geopolitical impact of the US position is even more interesting.

The Russians know how to handle a severe winter and that includes an economic blizzard fed by economic sanctions as well as a big slide in global oil prices. But Russia’s obstinacy over its neighbourhood relations has dug a big hole for its own economy which depends heavily on oil export earnings. The rouble is plummeting and GDP growth now looks like it will go backwards.

The oil price plunge has overtaken the gloom pervading iron ore companies in terms of headlines, but investors should remain vigilant for opportunities to bulk up their portfolios in this space.

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