For those portfolios with investment in the energy sector, each day’s news seems to bring about sweeping changes in price. One minute, the sector is focused on geopolitical spats between rival nations and oil prices surge. The next, abundant supply projections send prices downward.
It’s enough to make your head spin.
However, over the longer term, various supply and demand imbalances bode well for energy prices and stocks in the sector. For investors, ignoring the day-to-day noise and instead focusing on these disparities could be the secret to a good night’s sleep and lasting gains.
Growing Demand vs. Shrinking Supplies
Barring any sort of major world conflict or catastrophe, energy prices should continue their steady climb as worldwide demand grows unchecked. While events such as Iran’s current threats to close the Strait of Hormuz certainly will have their way with prices in the short term, the longer-term picture supports sustained higher prices. Currently, global oil demand is quickly climbing past 89 million barrels per day, and recent forecasts from a number of research organizations show that number will soon be eclipsed.
The Energy Information Administration’s latest projections show that global energy demand will rise by 53% from now until 2035. The bulk of this demand will come from emerging-market nations, who have just begun their “modernization.” China alone is projected to see their energy demand surge by 68% in that time frame. New sources of demand — from nations in the ASEAN, India and Latin America — ultimately will put pressures on supplies.
Likewise, in BP’s (NYSE: BP) latest energy missive, consumption by non-OECD nations will drive future energy demand growth. Both sets of research show fossil fuels still will be the dominate choice for powering our planet by the 2030s.
And in the face of all this bullish demand data, supplies are shrinking. BP estimates the world will need 16 million barrels per day to replace declining output from existing wells plus cope with demand increases. That’s a tall order, considering many of the world’s legacy and major fields are now facing dwindling production and reserves. While unconventional fields such as North America’s shale formations, Africa’s offshore deepwater fields and Arctic drilling will help, the costs associated with these sorts of operations will keep oil prices high. The EIA predicts these factors will see the world confronting average price floors of $108 per barrel oil in 2020 and $125 per barrel in 2035. However, the EIA price forecasts do not account for inflation expectations.
How to Ignore the Noise
With the long-term prognosis for oil demand still rising, investors might want to steer clear of the daily gyrations and focus on the continued supply-and-demand deficits facing the globe. Statistics like that fact that China’s energy deficit (across all fuels) will widen by more than a factor of five and India’s will more than double are what are really important to portfolios.
To that end, thinking broad might be best. The Vanguard Energy ETF (NYSE:VDE) represents one of the cheapest options for investors in the sector. The fund, which tracks 167 energy heavyweights — including Anadarko Petroleum (NYSE:APC) and Exxon Mobil (NYSE:XOM) — charges an industry-low 0.19% in expenses. The fund has been a solid performer as well, returning 11.8% annually since its inception in 2003. Similarly, the iShares S&P Global Energy Sector (NYSE:IXC) ETF, which includes international energy giants in its mix, can be used as another broad play for the sector.
Finally, I’ve written before about how the oil services subsector is one of the best ways to play the long-term rise in oil prices. For investors, the iShares Dow Jones US Oil Equipment Index (NYSE:IEZ) and SPDR S&P Oil & Gas Equipment & Services (NYSE:XES) funds are great ways to play the continued increase in energy prices and costs associated with unconventional drilling.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities. However, Levitt may initiate a long position in either IEZ or XES within the next 30 days.