Saturday, 18 October 2014

Long-term investors: Time to Fill up the Tank with Energy Exposure

To read the article on Stockopedia, click on the link below: 

Yes I know, the Oil & Gas sector has been a horrible place to be, really since mid-year. Trust me, my portfolios have suffered thanks to a sizable exposure to this sector.

But I believe that there are good reasons for expecting the oil price to rise, lifting the oil & gas sector with it:

  1. There is an OPEC meeting on November 26, and with Saudi Arabia as the official swing producer not wanting to be the only country to cut production, is turning up the heat on other OPEC nations to participate in coordinated cuts. Bear in mind that OPEC are producing a lot more crude today than in previous months/years thanks to recovery in Iraq crude production to near to 3m barrels/day, and more recently Libya which has raised production from very little to 750,000 barrels/day over the last 2 months. But no other OPEC producers, who had increased production originally to cover the Iraq + Libya shortfalls, have cut back meaningfully - yet.
  2. US oil refineries have been running at lower capacity rates as is normal for this time of year, of the order of 84% vs. 92% previously, as they go offline for scheduled maintenance. So as they come back online, US demand for crude should pick up again, helping to correct the unusual contango situation (where spot crude is cheaper than dated futures, whereas normally it is the other way around).
  3. Global demand for energy will continue to grow, most notably from emerging markets as they start to catch up with Western-style energy-consuming habits, and if anything, lower crude prices will encourage greater consumption, with a lag...
  4. There is still a risk of a cold winter hitting Northern Europe and the Northern part of the US - Siberia is seeing lots of snow, there is even snow already in Moscow! This often presages a hard winter in the North of the US, which would mean more oil and gas consumption for heating. 

Even with a small bounce today in Brent crude oil price to $86/barrel, it is still a very far cry from the $115/barrel touched back in mid-year. I would not expect necessarily to get back to these heady levels, but I would not be surprised at all the see Brent back above $90/barrel sooner rather than later. 

Wishful thinking, perhaps. But we shall see... In the meantime, I am increasing my holdings in a number of junior oil companies with exposure to US shale such as Caza Oil & Gas Inc (LON:CAZA), and also increasing my holdings in oil- and gas-focused ETFs in the US. 


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