Fiscal Cliff Deal Gives Energy Investors the Chance to Make a Bundle

Marina and I are still here in the Bahamas where our Internet and TV reception has been very sporadic over the past two weeks. It started improving on New Year's Day, just in time for us to watch our favorite situation comedy.

You know the one. It's called Congress.

And after much political jockeying and self-serving speeches from a largely empty floor, the House finally voted to pass the Senate's stopgap fiscal cliff Band-Aid.

Of course, the nation had technically fallen over the cliff after midnight January 1, but the holiday spared anybody inside the Beltway the problem of determining what that actually meant.

Welcome to the ongoing way of governing in Washington.  It's called brinksmanship. Along the way, America has dodged another political bullet.

According to the deal, income taxes are going up for individuals making $400,000 or couples earning $450,000 or more; unemployment compensation has been saved; the sequestration of automatic expenditure cuts has been delayed.

But let's face it, two months from now, when the debt ceiling comes up for another debate, we will head right back into crisis mode. In the long-term view, nothing has changed.

In the interim, though, we are going to make some serious money in the energy sector.

How long that advance goes on is an open question. But there is one overriding factor in all of this.

And the sooner you know what it is, the sooner you'll be ready to profit. Here's what I mean...

Fiscal Cliff Bump Will Not Lift All Boats

The post- fiscal cliff bump for energy stocks is not going to happen uniformly across the board.

Natural gas prospects for both extractors and midstream providers (gathering, initial processing, pipelines, terminals) are likely to remain subdued unless the winter turns colder; meanwhile, there will be little stimulus for solar, wind, or biofuels in the absence of renewed government subsidies.

However, the condition of other energy shares, especially those connected to the production, transport, and refining of oil and oil products will likely move up, some by significant amounts.

The reason is rather direct. A range of considerations have restrained the prices of both crude oil and processed oil products. But the main restraint has been concerns over global demand.

Now some of those misgivings have been greatly exaggerated. Nonetheless, with fears of another recession in the wings, nobody from producers through refiners to distributors and retailers has been prepared to conclude a spike in demand was on the horizon.

The prospects for such a spike center on broader economic developments. There have been few signals emerging to justify expectations on a demand surge. Over the weeks after the election, with a fiscal cliff fast approaching, uncertainty about tax rates and spending cuts, reluctance to make new hires, and a lethargy in both investor and consumer confidence continued.

Most of these elements are still here. But at least until the beginning of March, the specter of a self-inflicted economic wound is off the table.

So let's take what we can get now and work to position the portfolio accordingly.

Now that the fiscal cliff has been averted, stock values will begin the New Year on a nice upward ride.  But the truth is repositioning your portfolio today makes no sense (although taking some profit might).

In the meantime, investors should wait to prioritize their plans until the dust settles.

That may happen rather soon, since a fair amount of investor expectations on a Congressional settlement was already priced into the market by the end of 2012.

That's why I'm waiting until my next column to my post-fiscal cliff  strategy.

First, there are two overarching observations moving forward.  As I observed during the fourth quarter, energy shares have been underpriced. There is now upside potential that will be released by the avoidance of the cliff.

Second, there is a general balancing principle that should be kept in mind as you move from one crisis (the one averted last evening) to the next (the debt ceiling war two months from now).

Along with oil prices, a select list of battered down shares are expected to rise for a few reasons.

  1. Geopolitical tensions rising again in the Persian Gulf;
  2. Recurring concerns over actual global crude supply; and,
  3. Leading bellwether figures point toward a rise in economic activity.

Meanwhile, the balancing necessary will involve particular upstream and downstream oil companies, specifically positioned service providers and exchange traded funds. We will be looking here at several triggers that I will suggest you watch over the next several weeks. These will parallel moves up by designated energy segments.

However, remember that the volatility cycles in energy are also intensifying.

Those cycles have the potential to move shares up or down very quickly. That means a strategy needs to be particularly sensitive to short-term fluctuations in both performance (the technicals) and perception (investor emotions).

I will begin laying all of this out on Saturday just in time for the open next week.

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About the Author

Dr. Kent Moors is an internationally recognized expert in oil and natural gas policy, risk assessment, and emerging market economic development. He serves as an advisor to many U.S. governors and foreign governments. Kent details his latest global travels in his free Oil & Energy Investor e-letter. He makes specific investment recommendations in his newsletter, the Energy Advantage. For more active investors, he issues shorter-term trades in his Energy Inner Circle.

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