Warning: This might sound blasphemous

Thursday, 5 October 2017
Melbourne, Australia
By Bernd Struben

  • When the ‘invisible hand’ needs a nudge
  • Asian LNG prices soaring
  • Three 10-baggers by 2018?

As a paid subscriber to one or more of Port Phillip Publishing’s newsletters, you likely know we don’t hold a ‘house view’ on most things.

Phil Anderson, for example, gives you an extremely bullish case for US stocks over the next six or more years. He’d likely point out that all three major US indices closed for yet another day of record highs yesterday.

Vern Gowdie, on the other hand, provides the bearish flip-side and recommends running for the cover of cash. He’d also probably point out the new set of records on Wall Street. And highlight the unsustainable debt pile fuelling the rise.

(You can check out Vern’s work here. And Phil’s work here.)

Both Vern and Phil have ample historical data to back their views. And their thoroughly researched analysis is equally compelling. We leave it to you then to decide whose advice to follow.

That may depend on your own particular views of our editors’ investment recommendations. And it is likely contingent on other personal factors, such as your age, specific financial situation and goals.

But there is one thing all our editors agree on. And that is that free market forces almost always trump government interference.

If you’ve been reading Port Phillip Insider, you’ll know I stand firmly behind Adam Smith’s ‘invisible hand’. Meaning that if people follow their own self-interests, free market forces tend to bring about the best outcome for society as a whole.

With that in mind, what I’m about to write may come across as a bit blasphemous. Apologies in advance.

More after the markets.

Markets

Overnight, the Dow Jones Industrial Average rose 19.97 points, or 0.09%.

The S&P 500 gained 3.16 points, or 0.12%.

In Europe, the Euro Stoxx 50 index finished down 10.82 points, or 0.30%. Meanwhile, the FTSE 100 nudged 0.01% lower, and Germany’s DAX index gained 67.87 points, or 0.53%.

In Asian markets, Japan’s Nikkei 225 index is up 14.93 points, or 0.07%. China’s CSI 300 is closed all week for the Mid-Autumn Festival and National Day holidays.

In Australia, the S&P/ASX 200 is up 8.04 points, or 0.14%.

On the commodities markets, West Texas Intermediate crude oil is US$49.87 per barrel. Brent crude is US$55.80 per barrel.

Gold is trading for US$1,273.78 (AU$1,620.38) per troy ounce. Silver is US$16.59 (AU$21.04) per troy ounce.

One bitcoin is worth US$4,225.68.

The Aussie dollar is worth 78.61 US cents.

When the ‘invisible hand’ needs a nudge

Back in 2013, on one of my first days at Port Phillip Publishing, I got into a debate around the proverbial watercooler. And that debate had to do with Australia’s growing energy woes.

When I moved to Australia in 2010, I was already surprised by the price of electricity and gas. Far higher than in the US. Higher even than in much of Europe. And this in a country with some of the world’s largest natural gas deposits.

By 2013 those prices had only gone up. And today they’re higher still…having dwarfed the increase in the consumer price index (CPI).

All the extra money Australians are paying for their power is money that’s not going into other consumption. Or into paying off sky-high household debts. Not to mention consumers get slugged twice, as businesses attempt to pass on the cost of their own overpriced energy bills.

And this in a nation where almost 60% of GDP comes from household consumption.

Cheap energy, I argued, would benefit all. And — here’s the blasphemous part — the free market won’t deliver that. Why? Because Australia’s free market is the entire world.

What we needed, I said, was to ensure Australians got their energy close to cost. And that the government — gasp — should mandate a reserve for domestic consumption.

The protests came fast and furious. This will be a disincentive for any future exploration. Companies won’t explore and drill if it’s not profitable. What we really need is to open up more areas to extract gas.

Now, responsibly exploring for and extracting more gas is certainly part of the solution. But there are billions of energy-hungry neighbours at our doorstep. No matter how much gas Australia produces, there is an outsized demand waiting to take delivery.

Therefore, the basic law of supply and demand means Aussies will still be paying far too much for their energy.

We left the debate unresolved. Yet here we are, four years later, and Australia is battling to avoid gas shortages in 2018.

Asian LNG prices soaring

On the exploration front, the Turnbull government is pressuring states into opening the door for new gas fields. The federal government is now threatening to reduce GST revenue to states that don’t comply.

But the states, so far, aren’t budging.

From The Australian:

The NSW and Victorian governments are staring down calls from Malcolm Turnbull to relax restrictions on gas development, with Gladys Berejiklian declaring her state “will not be budging” from its position…

The NSW Premier said she was “not going to lose any sleep” over her state’s policy after Scott Morrison threatened state and territory governments with financial penalties by cutting their GST distribution if they limit gas exploration. The Commonwealth Grants Commission also recommended GST revenue penalties on the weekend…

Victorian Premier Daniel Andrews insisted supply was not an issue in his state and said the challenge was reserving enough Australian gas for local households and businesses.’

It’s not often that you’ll find me in agreement with Daniel Andrews. And when it comes to the fracking ban in Victoria — something Andrews supports — I’m certainly not in his camp.

But when it comes to setting aside a cheap energy reserve for domestic use, I’ll argue for that just as I did in 2013. After all, if energy is cheaper in Australia than in Asia, that’s a competitive advantage the Aussie manufacturing sector can sorely use.

It all goes back to supply and demand. Chapter one in every economics book.

First, increasing the supply in Australia will decrease the domestic price. That’s good for businesses. It’s good for households. And it’s good for the economy. As Donald Trump might say, ‘Australia first.’

Second, decreasing the supply overseas will increase prices in international markets. That’s good for every company involved in LNG exports. And it will go a long way to compensating them for revenues lost in the Aussie market.

But would an Australian national gas reserve really impact international prices?

The answer is yes. Not only that, as you can see in the graph below, the mere potential of Queensland selling its surplus gas domestically has seen the spot price of LNG in Asia soar 35%.



chart image

Source: Bloomberg
Click to enlarge

From The Australian Financial Review:

Asian LNG spot prices have spiked 35 per cent in the past month as the prospect that Queensland’s LNG ventures will be selling all their surplus gas at home over the next two years bites.

Prime Minister Malcolm Turnbull and the three Queensland LNG ventures signed off on Tuesday on a deal that forces them to fill a shortfall in domestic east coast gas in 2018 and 2019 as LNG market watchers said the growing threat of controls on shipments from Queensland has been driving prices in Asia.

It has also had an impact at home, with spot prices of gas in Victoria and other states on the east coast softer than they have been since early this year…

Even now that Canberra has backed away from triggering the export controls, Tuesday’s deal is seen having a similar effect as Queensland’s exports of gas will be essentially limited to long-term contracts.’

Look, you won’t find me supporting government intervention often. It tends to leave a bad taste in my mouth.

But even Adam Smith conceded that when it comes to property rights, the invisible hand needs to be backed by the rule of law. And Australia’s gas is, at the end of the day, Australia’s property.

Three 10-baggers by 2018?

Greg Canavan has been atop the looming gas crisis for years. He’s wisely steered clear of the politics. But he recommended three east coast energy plays to subscribers of Crisis & Opportunity in October last year.

Here’s what he wrote at the time:

As you probably know, Australia’s liquefied natural gas (LNG) sector has undergone a radical transformation over the past few years. Most of the activity has been centred around Curtis Island, just north of Gladstone, Queensland….

Put simply, these plants are removing conventional supply from east coast gas markets and selling it for higher export prices. It’s an unintended consequence of Australia’s massive LNG expansion. Guess what happens now?

Australia’s east coast gas prices will begin to move steadily higher and reach parity with the international gas price…’

All three gas plays got off to a positive start. One, up 25% since Greg’s tip, remains an active buy in the Crisis & Opportunity portfolio. Greg tells me he sees significant upside for the company yet.

Few people understand the intricacies of Aussie energy stocks as completely as Greg. And I’m not sure anyone can match his track record in ASX-listed energy stock tips.

At the end of August, Greg again honed in on this sector. And he recommended three new potential 10-baggers in the Aussie oil and gas industry.

Now, none have hit 900% returns yet!

But in less than six weeks, one stock is up 28.05%. Another is up 25.71%. And Greg’s third new energy play has already gained 81.82%.

He’s put that third stock on hold for the moment. But the first two remain active buys. And Greg’s convinced all three could still hit that magic 10-bagger return by a specific date in 2018.

To find out why that date’s important, and for all the details on Greg’s latest energy plays, go here.

Cheers,
Bernd