It’s a “Tale of Two Trends” in the commodities market lately. Crude oil is slipping amid rising supply and declining Chinese demand. Meanwhile, gold and silver are surging on expectations the Fed isn’t just finished HIKING rates in 2023…but likely to start CUTTING them in 2024. Top MoneyShow investing and trading experts have recently weighed in on how investors can profit – and what they expect to happen next.
Phil Flynn Price Futures Group
The market’s recent collapse suggests not only has the market taken out the risk of a loss of supply from the Israel-Hamas conflict but from any other conflict in the universe. It is also signaling a potential global recession that despite some real demand concerns, has not happened yet.
Today the Saudi oil minister is calling out those evil speculators, whom I am a proud member of, by saying that the recent selloff in oil is not about supply or demand but is “just a ploy”. Saudi Arabia’s energy minister Prince Abdulaziz bin Salman is calling out the recent oil price collapse by saying it’s “phony.” He seems to be very upset when he hears talk about weak demand out of China or any other play in the world.
The prince says that “speculators are the problem, not demand. Demand “It’s not weak,” People are pretending it’s weak. It’s all a ploy.”
Well, the ploy is working, and repairing the technical damage to the market is going to take a sharp price reversal. The ten-day moving average for oil is way up to 8018 and that looks so far away at this point. A close above that point would cause a sharp v reversal but is still far away. Yet as far as demand, the Saudi oil minister is correct, we have not seen a major drop in demand, but we have seen a major spike in oil demand fears.
We started the sell-off on fears of a Chinese demand crash on lower refining margins that pulled back from near-record highs. China lowered its selling price for oil products and that along with weak economic data caused a run on the Chinese oil bank. Yet after that sell-off, data for barrels of oil was strong. China’s crude imports spiked by 7% in October after its 13% drop in September. We also saw that China’s oil supply had dropped by 70 million barrels from late July through late October.
The Saudi oil minister said about 75% of Saudi Aramco’s exports go to Asia and they would be the first to know if there was any sign of a slowdown in demand. Today it is being reported by Giovanni Stanovoy that the government of the Shandong province China independent refinery hub has asked Beijing for an extra three million metric tons of fuel oil’s import quotas for the rest of 2023 to enable plants to raise output in a shortage of crude oil quotas. If refining demand was so bad, then why are they requesting more oil? There is another report today that Iraq is cutting off oil exports from Kurdistan they are claiming that there are overdue payments.
Still, you must respect market action. No demand isn’t bad demand. Oil demand normally slows down this time of year. Yet based on market action we must assume the possibility that the price of oil is like the canary in a coal mine signaling a major recession. And with an OPEC meeting coming up on November 26th, one must wonder whether the Saudi energy minister is going to make good on his previous promise to make speculators “Ouch like hell.”
What we are also seeing is a reversal of the war risk premium. When the market sometimes gets a lot of speculative buying due to war fears and it doesn’t happen, there normally is an oversized reaction to the downside. More than likely that is what we’re seeing. If you still believe in the bull case then options are the most attractive, as they have been in a year. If you are in a recession camp, then sell Mortimer, sell! The reality is it is based on current demand. Unless the global economy falls off the map, demand should go up not down from this point forward.
The other thing to keep in mind is that we normally see a seasonal low this time of year but usually, we start to turn around in price because refiners start to come out of maintenance. If you’re going to be negative this is the time to be the most negative. Oil products also look very weak even though we’re seeing signs of some life in the cost of our RBOB gasoline but we do have to see the market close strong to reverse the negative sentiment. It may take a few days before the market starts focusing on supply and demand and in the shoulder season it’s easy to predict that demand will stay low.
Remember all that talk of peak oil? How was the world running out of oil? Then came the shale revolution! Well, shale keeps coming. Market Insider reports that Legendary oil mogul Harold Hamm eyes the next stage in the US shale oil boom: ‘Generation Three’ rock. Mr. Hamm says that technology is going to exist to get oil out of shell rock that was previously considered to be too hard to handle. Don’t underestimate American ingenuity.
Marc Lichtenfeld Wealthy Retirement
In case you’re unfamiliar with it, Enterprise Products Partners is a 55-year-old oil and gas pipeline company. Its CAD dipped slightly in 2020, but in 2021, it rebounded to 2019 levels. It then exploded higher in 2022, but this year it’s expected to dip from $7.75 billion to $7.55 billion.
Last year, Enterprise Products Partners paid $4.1 billion in distributions. Since it is a master limited partnership, it pays a distribution, not a dividend. Distributions are similar to dividends but have different tax ramifications.
The $4.1 billion distribution was 53% of the company’s CAD. This year, that figure is expected to rise to 57%. That means for every dollar Enterprise Products Partners has in cash flow, it is projected to pay out $0.57 in distributions. That’s a low number, and it means the company can easily afford its distribution.
The other thing Enterprise Products Partners has going for it is its distribution payment history. It has raised its distribution in each of the past 25 years and just raised the payout to $0.50 per share in August. The stock recently yielded a juicy 7.2%.
The strong cash flow and quarter-century-long track record of annual distribution raises tell me the distribution is safe. The only mark against the company is the expectation that CAD will decline this year. However, even if cash flow does come in slightly lower than where it was last year, it will still be more than enough to cover the distribution – and a raise in the near future.
In fact, I like the stock so much that I recommended it in 2020 in The Oxford Income Letter. We’re sitting on a 143% gain as I write, and readers who bought it when I first recommended it are enjoying a gigantic (and safe) 13.4% yield.
Recommended Action: Buy EPD.
Brien Lundin Gold Newsletter
The reason for the rally, of course, was Israel’s forces massing for an invasion of Gaza. No one wanted to be out of the gold market going into the weekend. It was a classic safe-haven event.
So, bad news for the world and, in a typical bittersweet fashion, good news for gold bulls.
Now, while all of us who have portfolios packed with metals and mining shares are happy to see these rising prices, whatever the reason, there is risk ahead. And that’s precisely because of the reason for this rally.
As experienced investors in the sector know well, gold typically spikes on these kinds of geopolitical events, only to fall right back down (or lower) once things calm down.
But as I noted recently, there is a chance that this time is different. The Federal Reserve’s rate-hike cycle is either peaking or has already peaked. Chairman Jay Powell & Co. would be happy to have an excuse to lay off further hikes, or even pivot.
And this crisis in the Mideast, which is very likely to escalate and expand, could be just the excuse they need. In short, if this geopolitical event forces a shift in monetary policy, it will provide the fuel to take this rally in the metals far, far higher.
That’s the bottom line: With so much at stake in the weeks just ahead…with such great opportunities accompanied by such massive risk…we have to prepare for any scenario.
Adrian Day Global Analyst
We are not alone in pointing to the large increase in Treasury issuance coinciding with a lack of demand from traditional buyers (the Fed, China, Japan, and Russia, as well as US banks). Treasury issuance is increasing not only because of the widening deficit and the backlog of Treasuries from the debt-ceiling related pause earlier in the year, but also because nearly 30% of all outstanding Treasury debt will mature in the next 12 months and have to be rolled over.
These events perhaps show that the Fed has lost control of the narrative. Many commentators think that the Fed will be forced back into the Treasury market as buyers. And at any rate, the probability of a rate hike next month has dropped to just 7%, down from 30% a few days ago and over 50% in mid-September.
Indeed, a weakening economy and widening budget deficit will prevent the Fed from raising rates more in an election year, even as inflation remains stubborn. The acknowledgement of that confluence will spark the next bull market in gold.
As for Barrick, it reported mixed operational results. Pueblo Viejo had expansion ramp-up difficulties while the Carlin mine reported lower grades.
Although both gold and copper production showed increases on the prior quarter, and the company has indicated higher production in the fourth quarter, it is unlikely it will be sufficient for it to reach its annual guidance. Similarly, though cash costs are expected to have fallen from the second quarter, they remain above the company’s annual guidance.
Barrick will release its full quarterly financials at the beginning of next month. Separately Barrick has been granted a mining lease for its Porgera mine in Papua New Guinea, clearing the way for a restart of the mine that has been suspended for three years. This follows arduous negotiations between the company and various other parties, including landowners.
Once compensation is agreed with landowners, the mine can restart, probably before the end of the year. Under the revised agreements, Barrick and its partner partner Zijin will own 49% of the mine and be the operator. Barrick’s share of production could be as much as 250,000 ounces per year, making it the company’s 10th largest mine.
At present, Barrick has excluded Porgera from its 2023 and five-year guidance. Barrick, up 15% in a recent 10-day period, remains a buy.
Recommended Action: Buy GOLD.
MoneyShow’s Mike Larson sat down with Sam Stovall is Chief Investment Strategist at CFRA Research. Jason Bodner is Co-Founder of Mapsignals.com, and boy did they have a double-helping of bullishness to share, based on their research and their signals. That was at the very end of October…which was almost the EXACT bottom for the stock market. It was also followed by the strongest rally for the S&P 500 and Nasdaq Composite since 2021.