Why the Oil Sector Could Ignite in May Aussie banks left with no credibility Two clever and strategic decisions from China and India Plus, how Donald Trump could send oil spiking… Friday, 20 April 2018 Melbourne, Australia Dear Reader, The credibility of Australian banks is going through the wringer right now. According to reports, a financial adviser associated with the Commonwealth Bank was debiting the account of someone who had been dead for 10 years. Customers — those still breathing — were often charged for no service. Are you surprised by this? I doubt it. You might not like the banks. I don’t. But you can’t ignore them. They account for too big a share of the Aussie market. But in the context of the global economy, Aussie banks are irrelevant. They finance Australia’s rentier economy in which we trade real estate titles with one another. Productive businesses, meanwhile, find their capital elsewhere. The news on the credit front is positive around the world right now. As I explain below, it supports my belief that 2018 will be full of opportunities to make money… ****ADVERTISEMENT**** He’s done it again! It’s taken over 10 years of work — and the inclusion of a crack team chaired by a venerated oil and gas veteran — for this opportunity to come to fruition. According to an independent auditor, we’re talking about 28 million barrels of prospective oil. At today’s prices, that’s $1.82 BILLION in below-ground oil resource. More than six times this little firm’s current market cap. ******* China has a new central bank governor for the first time in 15 years. He just cut the reserve ratio for Chinese banks by 1%. It may not sound like much but, in the context of the Chinese financial system, it’s very large. One reason is that the cut will lower the financing costs for Chinese banks. More importantly, it should help small- and medium-sized Chinese businesses access credit. That’s positive, as they’ve been struggling to borrow of late. These are the firms that are going to hire workers as they expand, creating new goods and services in the process. This is great news for China’s economy. You want to see banks giving out loans to productive businesses. That’s what drives economic growth. Compare that to Australia, where we shovel bank credit into the housing market and drive up the cost of living… Unlike Aussie policymakers, the People’s Bank of China is making smart moves to boost growth. But the Chinese aren’t the only ones. Just south of China’s border, there’s plenty of positive news coming out of India as well. The Economist reports that a new bankruptcy code is going into effect in Asia’s third largest economy. This is very important. Bad loans are a drag on economic growth and bank lending. It’s something I covered earlier in the week in regards to Greece and Italy, which you can catch up on here. Anyway, in India, it’s been possible up to now for ‘zombie’ companies to survive even if they weren’t paying their debts because banks couldn’t seize their assets. That’s now changing. Now, however, if a company is in trouble, the board and management can get turfed out. The assets can be restructured, refinanced or liquidated. This is how capitalism is supposed to work. And it will make the Indian economy much more dynamic in the long run. In the short term, it will mean the state banks holding these bad loans will be able to foreclose on the assets or even sell off the bad debts. That will free them up to find healthier borrowers and drive credit growth in India. Even better, foreign capital is looking at Indian companies in distress to see if it can bring them back to health. There are deep resources looking to invest in Indian companies, and with a long timeframe. I still think the demand that could come out of India for goods and services is one of the most underappreciated factors in the financial world today. The Saudis realise this. The Wall Street Journal reported recently that Saudi Aramco, Saudi Arabia’s national oil company, is going to take a 50% stake in a project to build a US$44 billion oil refinery in Western India. It tells you where they see the big market for oil demand growth over the next decade. What’s more, India is laying down a lot of roads. Bloomberg reported in March that India’s National Highway Authority was on track to top US$15 billion in orders over the last 12 months. That figure is on track to hit US$100 billion by 2022. One wonders what the price of oil will be then. I’ve long held that oil will march higher in the years to come, and that this is a great time to be investing in smaller oil explorers. A spiking oil price could unleash the inflation genie that’s been dormant for so long. I think it’s fair to say that the resilience of the oil price is probably proving to be a surprise right now. US government data on Wednesday showed that inventories are now below their five-year average for the first time since 2014. The Saudis are deliberately holding down production to prop up the oil price. And now we have news that the prolific oil fields in the US Permian Basin are facing pipeline bottlenecks and a shortage of workers and raw materials. Oil stocks could be brewing for a massive run here if this dynamic gets out of control. There’s also a chance that Donald Trump will impose fresh sanctions on Iran next month. That would further impact global oil supplies, pushing up the price in turn. Adjusted for risk, that makes oil stocks a great buying opportunity right now in my view. Go here to learn how you can get started. Regards, Callum Newman, Editor, The Daily Reckoning Australia |