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Santos Ltd (ASX:STO) surges as oil hits 4-year high and market braces for US$100 crude

Oil stocks are on fire – but in a good way. The sector is the best performer on the S&P/ASX 200 (Index:^AXJO) (ASX: XJO) this morning after the oil price jumped to a four-year high in overnight trade, sparking predictions that it will soon be at US$100 a barrel.

The Brent crude benchmark added another 3.1% to US$81.20 per barrel, its highest price since November 2014, after rising the day before after The Organization of the Petroleum Exporting Countries (OPEC) rejected US President Donald Trump’s call for an immediate increase in oil output.

The oil rally is lifting our oil stocks with Santos Ltd (ASX: STO) gaining 3% to $7.34, while Woodside Petroleum Limited (ASX: WPL) and Oil Search Limited (ASX: OSH) have added more than 2% each.

The market is worried about a supply shortfall due to Trump’s sanction against Iran and a big drop in Venezuelan oil production as its economy teeters on collapse.

Many oil traders believe the Brent price is heading for US$100 a barrel due to a supply crunch but investors shouldn’t get too excited.

The head of BP Plc’s trading business in Asia, Janet Kong, is warning that any spike in the oil price won’t be sustained because the escalating trade war between the US and China hasn’t been factored into the price of crude, according to Bloomberg.

The US’ second round of tariffs on US$200 billion worth of Chinese imports kicked in yesterday. This is on top of the initial tariffs on US$50 billion of imports and US President Donald Trump is threatening to slap tariffs on all US$500 billion-plus worth of Chinese goods coming into his country.

The trade war will drag on economic growth and that means lower demand for oil as the commodity is closely linked with economic activity.

But the market is only focused on the upside to the oil price from falling supply at the moment. It shouldn’t be lost on investors that the oil price has diverged from the copper price as trade tension escalated. Copper is seen as a barometer for global economic growth as the metal is used heavily in industrial production and manufacturing.

Believe it a not, there are good reasons for oil bulls’ myopia. The market doesn’t quite know how much oil will be lost from the Iranian sanctions and it could be as high as 1.5 million barrels a day.

OPEC and Russia’s reluctance to lift supply immediately (but rather gradually) means the near-term shortfall could send a shock through the market.

Further, any drop in demand for oil from the global trade war won’t be felt until sometime in 2019, and there’s still hope that the US and China can work out their differences before any material economic slowdown takes hold.

So, while any spike over US$100 a barrel may not last long, I believe our oil stocks can still outperform for the rest of 2018 as I wrote yesterday (click here to read more about this).

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