The prices of crude oil, natural gas and refined petroleum products are on the move again all of a sudden, and energy stocks are awakening from a long slumber. The reasons are both demand and inflation.
The International Energy Agency reported earlier this month that demand from both the Middle East and Latin America is on track to rise +4.1% this year.
Meanwhile, demand in Asia is growing too. China is experiencing domestic fuel shortages, and the India leader Manmohan Singh told energy firms to start scouring the globe for fuel supplies. He said India’s demand for fossil fuels will rise +40% over the next 10 years and the country already imports 80% of its supplies. If the Indian economy keeps growing +8% annually, that estimate is probably low.
On top of that we have the commodity inflating results of quantitative easing and supposedly more economic growth will result. Crude prices, now at $85, are starting to get in the groove that gold, copper, cotton and grains have already enjoyed. A move through $89.90 will likely lead straight to $95-$100, and then we could very well see the path trod back toward the $145 level last hit in 2008.
This is probably why we have recently seen a spate of mergers, and a resurgence of interest in the American and European shale formations, which hold a lot of natural gas that is obtainable only through the very clever efforts of oil services companies that use a lot of awesome equipment.
You know where I’m going with this. It was fashionable during the last major market advance of 2003-2007 to be long all manner of energy stocks — explorers, drillers, onshore, offshore, service providers, fluids providers, transporters and the like. But they have really not sparkled in the past year. If you like to buy relatively low after a group has started to turn up this is the time to start thinking about this group.
The bottom clip of the chart above shows the ratio of the SPDR Energy (NYSE: XLE), which includes all the oil and gas stocks in the S&P 500, to the entire index. XLE strongly outperformed the broad market from 2000 to mid-2008, then massively underperformed until about a month ago. Now the ratio is starting to turn higher again in favor of the XLE. That’s been a good signal to go long in the past, especially given the other information we have.
With cotton, grains, gold and silver at record highs, can energy be too far behind?
