Today’s FT reports that crude prices have hit 11-week highs as Opec raises “ global oil demand forecasts for this year and next while lowering estimates for production outside of the cartel, even as the group’s own output rose for a third consecutive month in July”. Yesterday (Thursday 10th August) Brent crude prices hit $53.64 a barrel (an increase of 96 cents) while West Texas Intermediate increased 66 cents to $50.22 a barrel.

Obviously, this has attracted the usual chatter. Will prices push past $55 a barrel? Is the trend range of $40 to $60 a barrel over? I have to say that I still stick with the consensus view that US unconventionals will increase output drastically if prices stay consistently above $60 a barrel. And this supply elasticity will be helped by OPEC’s patent inability to control its member’s outputs.

Nevertheless, I am aware that I am sticking to what is a consensus view, which can be summarised “don’t panic, the US unconventionals can make money between 40 and 60 and that’s where prices will stay”.

Maybe though this consensus view is wrong?

That’s certainly the view of a well-known hedgie, also featured in today’s’ pink’un. According to the FT “ hedge fund manager, Pierre Andurand’s bet that oil will return to $100 a barrel has caught the attention of an industry more accustomed to energy executives warning they must prepare their companies to survive with prices less than half that level”.

You can see the full piece here:

Now, it’s important to say that Andurand hasn’t been right much this year but according to the FT his big bets have paid off in the past –  he has “returned investors in his eponymous $1.1bn fund a cumulative 560 per cent since 2008”.  Clearly all the usual caveats apply about hedgies and their past performance but his bold bet does give me pause for thought.

We’re all assuming that there’s a massive over supply of the black, physical, stuff and that it’s a one-way trade with US unconventional 9more supply boosted by cheap interest rates).

But what happens if

  1. The unconventionals in the US start to run into a supply wall, helped along by increasing interest rates pushing up the cost of capital?
  2. OPEC does actually get its act together and starts to curb supply more effectively?
  3. We all collectively under estimate the surge in global demand from emerging markets or
  4. We get a geopolitical blow out that badly impacts inventories and causes a panic?

Now I don’t think any of these are probable but they are all possible. If they do have an impact, the effect on sentiment could be quite drastic and we could see a nasty short squeeze – precisely because so many investors are betting on that core 40/60 trade. Personally, I’d like to think that I am well placed in either the 40/60 or 60 + scenario. I’ve focused my investments within this space on those stocks that will benefit from continued US Unconventional output growth (Riverstone and Pioneer Natural Resources) or lower cost offshore E&P names such as Premier and Enquest which will gain from a steady price of between 40/60. If prices do push above 60 both of these plays will benefit in the short term. And of course, both will be hammered if oil slips BELOW the 40/60 trend range.

One way to play battery stocks?

Which brings me nicely to one structural driver (or should I say headwind) that we keep hearing about with oil prices – electric cars and the rise of the battery economy. For the record, I do think there is a big shift going on which will reduce oil consumption for transport vehicles, I’m just agnostic about the technology. Maybe it will be all electric battery cars? Maybe fuel cells or maybe even hydrogen? Or possibly just vastly more efficient petrol and, yes, diesel, cars. The net effect is that oil demand in the developed world for oil for transport might wane. But all bets are off when it comes to the developing world – I can’t see a massive shift there especially given the current economics of electric cars.

But my agnosticism about battery powered cars doesn’t mean that I don’t think that demand won’t increase – far from it, I suspect that many millions in the West will be driving said electric cars over the next decade, especially in the big cities.

More to the point demand for battery solutions attached to renewables will help fuel demand as will home power storage solutions. That means I do keep a close eye on all the usual candidates in the mining ecosystem – lithium, cobalt, copper and other minerals.

As I write I am sure there’s a small legion of index developers looking to build the first Battery Index – which can be tracked by  an ETF – but for now we’ll have to make do with active stock selection, probably best done via a mining fund.

Top of that list must come one of the biggest mining investment trusts, BlackRock Gold & Mining (BRWM). It’s just released its interim results and whilst there were no great surprises – the NAV was down 0.3% on a total return basis, marginally outperforming the Euromoney Global Mining Index which fell 0.7% – there was an interesting side note on the fund’s increasing exposure to battery friendly metals. According to Numis “BRWM has 20% of the portfolio exposed to pure play copper producers (a combination of debt & equity), of which the largest exposure continues to be First Quantum (3.1% equity position; 5.0% debt)”.

The fund has also invested “in several companies with exposure to the expected growth in demand for battery power. The most significant of these is Albemarle (1.1% of the portfolio), an established lithium carbonate producer with arguably the two lowest cost production assets in the world, the Talison mine and the Atacama Salar. Galaxy Resources (0.4%) is an emerging lithium producer, which benefits from the producing Mt Cattlin mine in Australia, and “one of the most promising” exploration salars in Sal De Vida. The fund also has exposure to cobalt where the price rose 83% in H1 2017, with holdings in Katanga Mining (0.5%) and Cobalt 27 Capital (0.2%).”.

With the fund trading at a discount of around 10%, I think there be some upside here if investors start to see the fund is a sensible way into battery technology.  I sense a wall of money coming into anything battery related and we could see a classic bubble emerging, which could be great news for many stocks in the well run Blackrock portfolio.