Oil Prices
There's Always Money in this Fund
It's a tricky market out there for energy investors.
Even though opportunity abounds, there are plenty of factors driving ordinary investors away from the market, like global political tensions, ongoing concerns about available supplies, credit limitations for producers, increased volatility on the derivatives markets, and rising global demand.
There's a lot of noise, and short-term irrationality is trumping fundamentals.
But even amid the confusion, we know one thing for sure.
The price of oil is going to accelerate.
As Kent said on Monday, we have a very different dynamic taking place in the markets from the events of 2008. Three years ago, speculation drove oil prices, but an outside crisis decimated the global markets (namely, the subprime mortgage mess and the corresponding credit freeze).
But this time, we're experiencing a constriction produced by a significant cutback in new oil drilling. With greater unconventional production in the cards and greater concerns about the availability of supply, we're witnessing a perfectly predictable storm of events that will drive prices higher.
Still there's one thing that Kent and I continue to stress before you go out and start buying up energy stocks. That's this:
Rising oil prices will not drive similar performances in all energy companies.
You need to grasp an overall strategy to profit this time around.
The lack of cheap supplies and the cost of procurement in unconventional sources are major concerns. So is the acceleration in short-term swings in volatility. We are entering a period of boosted unconventional oil and gas production to tackle these challenges.
Access to unconventional sources has set off an energy boom here in the United States, as new technologies have enabled this country to greatly improve its oil and gas sourcing. Moving forward, the United States will look to its oil and gas shale plays and to source an expanding fuel supply from our neighbor to the north: Canada.
But it won't be cheap to do this, especially while increased swings in volatility become the norm.
So what's the best way to play volatility while managing your risk?
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Oil Price Manipulation: What President Obama Doesn't Understand About Oil
If you think gasoline prices are volatile now, stay tuned. President Obama's plan to clamp down on oil speculators is going to make things worse.
I'm sure you've seen the news by now.
The president wants to clamp down on so-called "oil price manipulation" and has proposed a $52 billion plan to increase f ederal supervision of oil markets.
What the p resident doesn't understand is that the oil markets already have this function built in.
Speaking from the Rose Garden last Tuesday, President Obama noted specifically that we can't afford to have "speculators artificially manipulating markets buy buying up oil, creating the perception of a shortage and driving prices higher – only to flip the oil for a quick profit."
Evidently, the president hasn't passed Econ 101.
If he had he would know that prices on everything from eggs to houses are by their very definition self regulating.
Speculation, as opposed to manipulation, is a vital part of the markets – they are not the same thing despite the fact that the p resident is interchanging the terms.
If prices are too high, people stop buying. If prices are too low, they stop selling. By authorizing $52 billion in oversight, he's chasing a ghost that he'll never catch.
The Real Problem with Oil Prices
The real problem is that the United States consumes 20% of the world's crude but only produces 2%.
It comes a time when oil demand is expected to rise more than 25% (to 105 million barrels a day) by 2015, according to a new report titled Oil and Gas: A Global Outlook by Global Industry Analysts, Inc.
If you want the biggest piece of the pie from the deli, you have to pay a premium.
There is no hocus pocus and there's no additional oversight necessary. Rather, we need to enforce the laws we already have on the books.
Sure the $10 million fines he's jawboning about (up from $1 million) sound great but they're really a non-starter. In fact, given that Exxon Mobil Corporation (NYSE: XOM) alone generated an average of $1.33 billion a day in 2011, they're little more than an acceptable cost of doing business. Nice try.
Take gasoline, for example.
Prices have jumped 78.2% since the p resident took office and that doesn't sit well with the party faithful who are convinced that evil oil price speculators are responsible.
They are distraught that traders put hundreds of billions of dollars into energy every month because that may cause prices to rise.
This is not complicated. Any time there are more buyers than sellers, prices go up. Any time there is more demand than supply, prices go up.
Contrast what's going on in the oil markets with what's happening in natural gas.
Prices for natural gas are at ten- year lows. Demand has risen but supply has risen faster. There are more suppliers than buyers. So natural gas prices drop.
Natural gas, by the way, is traded by many of the same traders who trade oil.
Election 2012: President Obama Can't Solve High Oil Prices with Trading Regulations
The Obama administration lost its bid to get the Buffett Rule (which would have increased taxes for those earning $1 million or more) passed, so on Tuesday it shifted focus to another battle: Slowing the rise in oil prices.
U.S. President Barack Obama's proposed solution to painfully high prices is to limit speculation in oil markets.
The new bids that the president proposed seek more money ($52 million) for market enforcement and monitoring activities, call for loftier penalties for market manipulation, and require oil traders to put up more of their own cash for transactions.
At a White House press conference Tuesday President Obama said, "None of these will bring gas prices down overnight. But they will prevent market manipulation, and help protect consumers."
The move is in stark contrast with Republicans, who have been lobbying for more domestic drilling to help alleviate the near record-high gas prices. Paying more at the pump takes a bite out of consumer spending and has the potential to stall the slow-going economic recovery.
The maneuver, however, may be focused more on political strategy than consumer interest.
It is extremely doubtful that House Republicans will pass any measure that aims to implement more limits on Wall Street while the GOP looks to reduce regulation of the financial sector.
House Speaker John Boehner, R-OH, called it a political ploy and disparaged President Obama for not using the means already at his disposal to deal with the oil situation.
"The president has all the tools available to him if he believed that the oil market is being manipulated," Boehner said. "Where's his Federal Trade Commission? Where is the SEC? He's got agencies there. So instead of just another political gimmick, why doesn't he put his administration to work to get to the bottom of it?"
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High Oil Prices: Even $200 Oil Won't Cause a Recession
Last Friday's weak unemployment numbers, with only 120,000 jobs created, brought renewed wails that high oil prices were causing a recession.
Having heard this refrain so many times, I thought I'd dig a little deeper.
After all, a peak of $145 per barrel in the West Texas Intermediate oil price pretty well coincided with the onset of the 2008 recession.
The question is whether or not high oil prices are always correlated with an inevitable downturn.
For instance, when you look closer, oil was not to blame in 2008. Other factors were much more serious culprits, including the housing crisis (by then in market collapse) and the banking crisis that followed.
Between them they are the hallmarks of financial crisis that brought on the nasty recession.
To find out why, we need to do a little arithmetic.
High Oil Prices and the Economy
The U.S. Bureau of Labor Statistics breaks down personal consumption expenditures (PCEs) on energy versus other items on a month-by-month basis.
The PCE on energy goods (which include natural gas and electricity) rose from 5.05% of total PCE in 2004 to 5.88% in 2007 and 6.31% in 2008. When oil prices peaked in July 2008 PCE hit a maximum monthly level of 7.01%.
Thus taking the increase from 2007 to the highest month in 2008, energy PCE rose by 1.13 % of total PCE, or about $115 billion on an annualized basis.
That sounds like a lot of money, but it's well under 1% of GDP.
For example, it's less than the estimated $152 billion cost of former President Bush's ineffective 2008 tax rebate stimulus.
Indeed, it is one-seventh the size of President Obama's stimulus the following year, which didn't have much visible effect. Thus the high oil prices of 2008 might have made the difference between marginal growth and marginal decline, which according to the "butterfly effect" of chaos theory could have caused other larger changes.
However, high oil prices were certainly not sufficient to push an otherwise healthy economy into recession.
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