OPEC breakthrough, two ASX stocks to watch and … All Ords to trade higher?
OPEC+ resumed talks this week, with a view to planning for 2021 and the continuation of output cuts to support the oil price in a time when demand is lower as the world recovers from the pandemic.
A deal is expected to be reached for cuts of 7.7 million barrels per day which has seen oil trade around the $45.50 mark.
The question mark was on compliance to these cuts which had been a problem previously with some of the smaller member nations reluctant to cut their supply.
However, by Friday OPEC and a group of Russia-led oil producers agreed to increase their collective output by 500,000 barrels a day in January.
Experts believe this move signals that the world’s biggest producers are betting the worst of a pandemic-inspired shock to demand is behind them.
The Wall St Journal reports: “The deal marks a compromise after sharp disagreements earlier in the week among a group of producers that have acted in relative concert for months, agreeing to cut production deeply to stabilize oil markets. The coronavirus pandemic sapped global demand early this year, tanking prices and straining the finances of big producers such as Saudi Arabia and Russia...
“...In recent weeks, international oil prices have started to bounce back, climbing some 25% since the start of last month. Asian economies have been recovering strongly, boosting oil demand there. Oil investors, meanwhile, have bet on future demand growth elsewhere after a series of promising milestones hit by several Covid-19 vaccines in development. This week, the UK authorized one for emergency use, setting in motion the West’s first mass vaccination drive.”
In other words, it’s now a good time to be looking at oil again.
Yet, caution should still prevail.
As the International Energy Agency said in mid-November, "Vaccines are unlikely to significantly boost demand until well into next year.”
Despite this, we tend to agree with Saudi Energy Minister Abdulaziz bin Salman who said the oil market is finally seeing 'light at the end of the tunnel.”
One small cap stock to watch in this climate
Given the changing tide in oil fortunes, it couldn’t be better timing for 88 Energy (ASX:88E) to have big news.
This active oil explorer is searching for a multi-billion barrel prize on the prolific North Slope of Alaska.
88E has negotiated an important farm-out agreement in relation to its Project Peregrine asset.
This is a significant milestone for the group as a sharing of exploration costs for the upcoming drilling campaign was an integral part of the development program.
In order to take a stake of 50% in Project Peregrine, farm-out partner Alaska Peregrine Development Corporation LLC (APDC) will contribute US$11.3 million towards the cost of the Merlin-1 well which has an estimated gross cost of US$12.6 million.
88E is set to drill Merlin in February.
This could set the company off on a significant share price run in the coming months, on strong volumes, in the lead up to this large drilling event in February 2021.
One other ASX small cap to watch
Pursuit Minerals (ASX:PUR) is a long way removed from the oil scene, but is another ASX stock to watch.
The company this week picked up tenements in the Julimar, region which may not mean much to you, however is quite significant.
Earlier this year, Chalice Gold Mines Ltd (ASX: CHN) made a groundbreaking discovery that sent its share price soaring over 1,600% since January. The $1.2BN became one of the top performing companies on the ASX this year.
PUR has acquired a 593km2 tenement package, a mere 50km north east of CHN’s discovery.
PUR is valued at just $10M market cap and having recently raised $2M, appears reasonably funded going into exploration and drilling which will kick off early next year.
Note, PUR has a tiny market cap, and is early stage exploration, so is a high risk, high reward investment.
What to watch on the international front
Here is eToro analyst Adam Vettese’s take on what to watch internationally.
Dollar General (NYSE: DG)
Discount retailer Dollar General has added almost 40% to its share price in 2020, taking its market cap past the $50BN mark. Along with other discount retailers, Dollar General’s gains this year have been driven by consumers stocking up on staples, and turning to cheaper options in the face of pandemic-induced economic uncertainty. The company beat earnings expectations substantially in Q1 and Q2. Analysts are expecting an earnings per share figure of $2.02, and currently lean towards a buy rating on the stock.
DocuSign (NASDAQ: DOCU)
Digital contract signing firm DocuSign has enjoyed a huge 2020, with its share price up by almost 200% as companies and individuals have been forced to use such services in the absence of in-person meetings. Although the firm has competition from Adobe and other firms, DocuSign offers purer play exposure to digital signing services for investors. Investors will be looking for signs the company can convert the pandemic environment into lasting growth. Currently, 13 Wall Street analysts rate the stock as a buy or overweight, five as a hold and one as a sell.
The best and worst performing sectors this week
The Australian stock market has had a relatively flat week with only two sectors currently in the green. The best performer is Materials up nearly 5 per cent followed by Energy and Information Technology both up less than 1 per cent. The worst performing sectors include Healthcare down over 2 per cent followed by Utilities down nearly 2 per cent and Communication Services down just over 1 per cent.
Looking at the ASX/S&P top 100 stocks, the best performers include Fortescue Metals up over 11 per cent followed by Oz Minerals and Rio Tinto both up over 10 per cent. The worst performers include A2 Milk down over 6 per cent followed by Magellan Financial and Treasury Wines Estate, which are both down over 5 per cent.
So what's next for the Australian share market?
According to Wealth Within’s Dale Gillham, “Last week I mentioned that the strong momentum we experienced in November would slow and earlier this week there was weakness in the All Ordinaries Index as it technically traded lower than the previous week. It remains to be seen if this short-term weakness continues next week with another move down in price.
“Either way, there is nothing to be concerned about as I expect the All Ordinaries Index will generally trade higher over the coming months to break above the previous all-time high of 7,289 set back in February of this year. The next major high is likely to occur sometime between mid-January and mid-February.
I previously indicated, Energy, Materials and Financials were my preferred sectors moving into 2021 and over the past few weeks, these sectors have certainly been strong. I still expect more opportunities to come from these sectors in the coming months, therefore, I encourage everyone to stick to blue chip stocks rather than speculate on more risky stocks.