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Protrader – July 2018 Market Wrap

//Protrader – July 2018 Market Wrap
professional share trader

Has Oil got us over a barrel?
XJO
Continued Uncertainty
Up 103 for JULY

The Australian market was up over 100 points for the month of July, and actually hitting a decade high in the first week. However, once again due to conflicting concerns around potential trade wars, and domestic issues such as ASIC launching Federal court action against AMP, and pending doom, surrounding the housing market the early rally was unable to be sustained, resulting in the market losing steam, and oscillating between 6200 and 6300 from July the 6th for the remainder of the month.

KEY ECONOMIC DATA

  • RBA holds the rate steady at 1.5%
  • Unemployment rate steady at 5.4%
  • China GDP 6.7%
                     DOW JONES IND AVG 24,161 – 24,415 : UP 254

 

DJI 12 MONTH CHART

The month of July saw the Dow claw back the correction from the last two weeks in June, with a rise of 254 points.
Once again the sheer weight of phenomenal economic and corporate data compelled the market to override continued fears around a potential trade war.

The corporate season so far with around 84% of S&P 500 companies beating market expectations is on track to be the best earnings season since 1994.
This stellar corporate earnings season coupled with simply amazing economic data, such as Initial Jobless Claims dropping to the lowest level since Dec 1969 (48.5 yrs), and GDP hitting 4.1%, empowered the market to reach high’s not seen since February, and the NASDAQ to reach all-time high’s.

Key Developments in the Month of July

  • GDP HIT 4.1%
  • Trade War escalation with China.
  • Continued positive domestic Economic Data
  • Tech stocks hit an all-time high
  • Federal Reserve Senate testimony confirmed the likelihood of 2 further Interest Rate increases.
  • EU trade dispute resolved.
  • Intitial Jobless claims lowest since DEC 1969.
                        OIL STOCK UPDATES: Massive upside potential

 

Brent Crude – Fall from $74.40 – $68.40

The Oil price fell back $6 over the month of July, primarily due to increased production and inventory levels.

This month we are going to take a closer look at the Macro Oil picture, and the likelihood of a supply shock leading up to November.

Existing Production

Throughout the month of July, there were several supply disruptions that after initially causing oil prices to spike, were then followed by a fall as production rates from Saudi Arabia, Russia, and US allayed fears of a shortfall. However, on closer examination, we can see that the seeds of a potential supply shock are developing, as both OPEC and the U.S, are possibly at maximum capacity.

Using the two charts below, we can see that both Russia and Saudi Arabia, are already at virtually all-time production high.

When we combine this with the fact that the US is also now at record production and are in fact exporting Oil for the first time since WW2, what becomes apparent is that the world’s major Oil producers are in fact already at full production.

So what will happen to the price of Oil, if there is a supply shock?

                                    POTENTIAL SUPPLY SHOCKS
The two biggest potential supply shocks are that of Venezuela and Iran.

Iran
Now before we delve into the modern issue surrounding Iran, we must first set the stage by going back into history to gain a greater insight and understanding of the cultural and diplomatic characteristics of the Iranian regime.

In 480 BC when the Greek state failed to pay some paltry taxes to the Persian Empire, the Persians felt the best course of action, was to start the Greco -Persian war, build the longest pontoon system in history (2500m), send approximately 250,000 soldiers to Greece and burn Athens to the ground. Which they promptly did.

Moving forward 2500 yrs, we are now facing a geopolitical environment where the U.S has withdrawn from the 5 nation Iran pact and are threatening to reimpose sanctions on Iran by November.

Naturally, Iran hasn’t responded calmly to this and has threatened to attack all Oil shipments passing through the Strait of Hormuz, and for good measure are also now backing Houthis rebels at Bab -El -Mandeb to launch missile strikes upon all Saudia Arabian flagged Ships, as has already occurred twice in the month of July.

The below diagram, clearly outlines how susceptible about 40 % of the worlds Oil supply is, to these two choke points.

Venezuela
In addition to the Iranian issue, we also have the compounding problem of Venezuela. The continued trajectory of production decline is symbolic of the near complete and now likely inevitable collapse of the entire state of Venezuela. To what extent and how long this will impact upon Venezuelan Oil production is impossible to guess, but as we can see from the chart below, Oil production has been dropping off dramatically.

Conclusion

What is important to understand, is that with U.S, Russia, Saudi Arabia and other OPEC nations such as Nigeria, already effectively at full production, what will happen if there is a further supply shock, whether emanating from Iran’s actions, or Venezuela’s collapse. In addition to these potential major supply shocks, there are also an array of mundane disruptions such as Libyan port access and Norway Industrial action also impacting upon Oil supply.
If a major supply disruption occurs, there is only one direction for the price of Oil to go, which will ultimately benefit Oil & Gas producers.

BEACH ENERGY – BPT

BPT – Beach Energy: $ 1.91

With the above Macro Oil view in mind, combined with BPT’s recently improved Quarterly Report and a substantial increase in both reserves and production, it’s a case of right time and place for Beach Energy.

Further to our previous report, BPT has now broken through the resistance level between $1.80 – $1.85.

Quarterly Report 30th June 2018: Highlights

  • FY Sales Revenue $1.25 B
  • 4Q Revenue $471 m Up 20%
  • 4Q Sales 7.6 m Barrels Up 12%
  • 4Q Production 7.23 m Barrels Up 10%
ETF LOOK

ZYAU – Etf Securities S&P /ASX 300 High Yield Plus ETF : $11.35

An ETF with the following key benefits.

  • Exposure to S&P/ASX 300 Australian stocks
  • Exposure to the highest yield paying 40 stocks from the S&P/ASX 300.
  • Dividend paid Quarterly.
  • Great way to spread portfolio exposure beyond simply the ASX 200.
  • 9.65 % Dividend AVG

YMAX – BetaShares ASX 20 ETF : $9.01

An ETF with the following key benefits.

  • High Yield exposure to the 20 largest Australian Stocks.
  • Focused exposure to Australian Blue Chips.
  • Quarterly Dividend
  • Amazing Gross Div: 10.3%
  • Important: The options strategy used by this ETF, is a defensive investment, and can be expected to underperform a strongly rising market, from a capital gain perspective.

If you would like to take advantage of this & future opportunities, please call us on (08) 9202 3900