Quick thought, following your comment on America's oil glut, and Morgan Stanley's report you highlighted.

I have been watching the difference in price between the WTI and Brent Crude for a long time now. The difference seems to vary between 10 and almost 20% depending on the day, with WTI obviously being the cheaper. Is it too SIMPLISTIC to say?

1) that US factories, offices, homes etc enjoy an enormous advantage over their global competitors with energy costs being so much cheaper, not forgetting it already enjoys a significant tax advantage over many as well.

2) when the US does become a significant oil exporter, it can make a lot of profit, even by offering only minor discounts to the Brent price to attract business. Possibly more profit than from its LNG exports.

Eoin Treacy's view

Thank you for highlighting these points. I’ve always been a fan of Ockham’s Razor. There is no need to get over complicated. The USA has a massive advantage in terms of its oil and gas production capacity. That is reshaping global geopolitics, it will have a meaningful effect on the balance of payments and it has already had a meaningful effect on the chemical industry because of reduced input costs.  one.

I haven’t looked at the Dow Jones Industrials Average / Historic Oil chart in a while but it offers a valuable picture of how when oil outperforms the stock market ranges and vice versa. This chart suggests we are in another secular bull market for stocks versus oil suggesting the big beneficiaries will be consumers.

The wild card in the oil market is always going to be geopolitical. Iran or its proxies attacking oil tankers is a potentially short-term bullish outcome particularly if the situation escalates. However, these kinds of activities while jarring in the short term are not what major bull markets are made of. Longer-term, the potential for the USA to become the dominant global energy exporter, with a mix of oil, gas and potentially hydrogen, would reduce the impact of geopolitical events.  

The energy and proximity advantage US manufacturing has as a result of the shale boom is significant. The lack of middle management with the experience necessary to run factories is a challenge not easily remedied. Nonetheless, the energy advantage angle is another lens through which to view the trade war. It literally encourages companies to at least include repatriation in their calculations of where to migrate manufacturing to.