While gasoline prices have declined to just above the $3.00 per gallon level in the Dallas-Ft. Worth area, drivers and investors shouldn’t become complacent about modest post-summer price relief. Prices for light sweet crude oil are again bumping up against the $100 level. Today a barrel is trading for $96, up from a September low of $77.
Many economists predicted prices would trade around the $80 level for several months. It appears those forecasts were low. Interestingly, the vast majority of energy-related stocks are trading at levels that seem to endorse such forecasts. We see a potential investment opportunity if analysts start to expect higher prices and increase their earnings’ forecasts. This could be very good for equities, since the single most important influence on long-term prices is profits.
What could be an impetus for this to happen? Our analysis indicates global supply and demand is continuing to tighten. Producers just can’t seem to increase output equal to the rise in demand. Higher utilization is coming from emerging market countries. Some forecasters predicted that China’s economy would slow down significantly as a result of government credit restraints. What seems to be occurring instead is a “soft landing” that will help remove excesses but bring little change in underlying energy demand. By “soft landing” we mean Q3 GDP growth of 9% instead of 11%, a rate that is still many times that of the developed world.
The Chinese government’s latest 5-year plan calls for more emphasis on domestic consumption and less focus on exports. This could reduce crude demand slightly as energy demand slows for manufacturers. On the other hand, the country continues to experience a huge population shift from the country to cities. The percentage of urban population has risen from just below 20% in 1980 to approximately 50% today and is currently rising at its fastest rate on record. This should result in increased purchases of homes, vehicles, appliances, and many other items that consume energy. The same trends apply to other Asian countries, although at different paces.
Looking at our SELECT List choices in this sector (Apache, Chevron, Devon Energy, Oceaneering International, Schlumberger, and Dynamic Energy Income Fund), one-half of them are trading at greater than a 20% discount to their yearly price highs. All six are trading below their peaks. In general, energy company earnings are expected to rise nicely at year-end and in 2012, despite slow growth in the overall economy.
We view the current period as a time to over-weight energy positions in investor portfolios. They appear quite attractive in the current environment. The sector is one our highest conviction opportunities into the first half of 2012.
For more information on energy stocks, please contact an IAM advisor.
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The Select List represents all of IAM’s recommendations as of August 15, 2011. A list of all recommendations made by IAM within the immediately preceding one year is available upon request at no charge. IAM is under no obligation to hold any equity position for any time period, and the recommendations on the Select List are subject to change at any time without notice. The Select List should not be considered as personalized investment advice, and the securities information contained therein should not be construed as an endorsement, solicitation, or recommendation to purchase or sell any security. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment on the Select List, or any recommendations in the future, will be profitable.
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