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?