The energy stocks are among the best performers on the market today as the price of crude surged to its highest level this year.
But it is Woodside Petroleum Limited (ASX: WPL) that is gaining more of the spotlight on a gas discovery and news that its largest shareholder has made an audacious bid for its UK rival.
Energy giant Royal Dutch Shell made a $US46 billion ($60.1 billion) play for BG Group in what has been described as the world's largest oil & gas acquisition in at least a decade.
There are two significant implications that Australian investors should be aware of.
Firstly what this shows is that, unlike their iron ore peers, cashed-up energy companies are brave enough to jump on depressed assets as the industry struggles with slumping commodity prices that are brought on by surging supply and lacklustre demand.
I am expecting more deals in the sector to follow, but the more immediate question facing Woodside shareholders is whether Shell will be tempted (or forced) to sell down the rest of its 13.6% stake in the Australian major to help finance its marriage proposal to BG.
Shell is a reluctant shareholder in Woodside following its failed attempt to offload the majority of the investment through a selective buyback last year.
Shell might be willing to accept a big discount for its Woodside shares if it really needs cash for the acquisition and that will certainly put Woodside's share price under pressure.
This is probably one reason why Woodside's share price is lagging most of its peers this morning even as it announced a gas discovery at its Pyxis-1 exploration well. Drilling has uncovered substantial net gas at the site, which is just 15km north of Woodside's massive Pluto project that's off the coast of Western Australia.
Woodside climbed 1.8% to $34.99 but that pales in comparison to Oil Search Limited's (ASX: OSH) 4.6% surge to $7.56, Santos Ltd (ASX: STO) 2.8% uplift to $7.30 and Beach Energy Ltd's (ASX: BPT) 4.8% gain to $1.13.
The S&P/ASX 200 Energy Index (Index:^AXEJ) (ASX: XEJ) is up 2.1%.
The other key takeaway is how Australian resource giants are increasing their stranglehold on global commodity markets.
There have been some reports looking at how Rio Tinto Limited (ASX: RIO) and BHP Billiton Limited (ASX: BHP) will ultimately become more powerful players in the iron ore market as higher cost producers fall to the wayside.
The same is true for our large energy companies, in part because they have been early movers in building massive liquefied natural gas (LNG) projects.
Credit rating agency Moody's is predicting that 52 liquefaction projects in North America will be scrapped as a surge in supply from Australia and the US is depressing gas prices to a point that many projects have become financially unviable.
Current projects that are under construction are not at risk but will contribute to the oversupply of the LNG market for the rest of this decade.
Australia alone will contribute to a 25% increase in liquefaction capacity in 2017 from about $US180 billion in investments, according to Moody's.
It's short-term pain but long-term gain for Australia's highest quality oil & gas and iron ore miners. I can't pick the bottom of the market, much to my chagrin, but I know I want to be on that ride as the market comes out from the other side.
