Palisade Research - Tue, Jun 6, 2017

The Difference Between Cycles & Shifts In Paradigm

picture of a desert oilfield

Early this week, Bahrain, Saudi Arabia, the United Arab Emirates (UAE), Egypt, Yemen, and Libya all suspended diplomatic relations with Qatar.

Saudi Arabia declared the move was to "protect its national security from the dangers of terrorism and extremism." The five countries accuse Qatar of backing militant groups including the Islamic State and al-Qaeda, something Qatar vehemently denies.

Regardless, the move is a significant rift between controlling Gulf countries, who all happen to be close allies to the United States.

Surprisingly, oil prices are trading down on the news. Any other time in history, this kind of news would have guaranteed an uptick in crude prices.

So what's changed?

There has been a shift in paradigm, there is simply too much supply, and the electrical vehicle revolution stands to squash the once insatiable demand for gasoline.

pie chart showing how the uses of a barrel of oil breaks down

Currently, over 50% of a barrel of oil is used for gasoline. The United States leads the way in the world's demand, consuming 19.63 million barrels of oil per day (bopd), or 20% of total consumption. This fact is important because the US also leads the world with vehicles on the ground, with 253 million cars and trucks with an average age of 11.4 years.

Just as technology has unlocked massive reservoirs of oil, there have also been significant advances in the automotive sector, namely in efficiency.

line chart showing the average fuel efficiency of US light duty vehicles

There is no denying that as cars become more and more efficient, the world will become less dependent on oil. This has been apparent in forward-thinking investors awarding Tesla a market cap greater than Ford Motors, and buying up lithium stocks. Lithium was one of the top performing commodities in 2016, gaining over 70%.

line chart showing the performance of lithium and lithium junior stocks in 2016

Lithium junior stocks in turn gained a staggering 324%. The leverage is apparent, and investors rushed to invest in any lithium stock they could. While only a handful to begin with, the TSX and TSX Venture is now home to over 60 companies in the niche sector.

Cobalt, on the other is hand, is another vital component to the electric vehicle revolution, and boasts even greater fundamentals than lithium. In fact, for 2017 cobalt is the number one performing commodity, gaining 72%.

line chart showing the performance of cobalt and cobalt junior stocks in 2017

Cobalt juniors, on the other hand, have been largely underperformed compared to the astronomical gains of lithium stocks. This means there is still significant upside in cobalt stocks, and there are only a dozen stocks an investor can currently put their money.

For more information on cobalt, we recommend reading this primer we published last year. The fundamentals for cobalt have never looked stronger, and as the first movers into the space, we are putting our money into two stocks. Don't miss the boat.

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