3 Reasons Why The Energy “Experts” Are Wrong (XLE, UCO, USO, CVX, COP, SCO)
Kent Moors: Last week, another batch of oversimplifications attempted to explain a significant decline in energy stocks.Excuses ranged from declining demand to shale oil and gas gluts. Others pointed toward a general market Armageddon.
But you and I know better than to believe this hype.
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Last week the S&P closed at a five-year high, NYMEX West Texas Intermediate (WTI) crude oil futures closed higher than in any session since September 18, while the spread between WTI and London’s Brent benchmark rate is the narrowest it has been since September 14.
We recognize that the harbingers of doom are right only if markets and economies completely collapse. Once again, we know that is not going to happen.
None of this means we are simply off to the races. But they do indicate how the half-baked approaches used by some “experts” are not reflecting reality.
Their arguments are wrong for three very basic reasons. And once you learn them, you stand to profit from the biggest energy trend in decades.
Why You Need to Avoid the Hype in Energy
First, these pundits conclude something will automatically occur simply because it’s possible.
For example, the argument rests on the observation that because a new field could be discovered, it will automatically be developed or that problems experienced currently with fracking in unconventional production could be solved by later technical breakthroughs.
“Because something is possible” does not mean it’s guaranteed.
Even if a breakthrough occurs, new extraction methods are introduced when the market requires them. Nobody just floods a market with product. There would be serious consequences. Most of the production levels expected from shale fields are determined by companies balancingcapacity with demand. This is not a race to bankruptcy.
Which leads me to the second mistake.
Producers, processors, and distributors of both oil and gas-based products do not simply pump, refine, and transport so that they can depress end-using markets with excess product. The entire upstream-midstream-downstream process has its own internal balancing. Once again, this is not a function simply of what is in the ground and extractable.
It is determined by what the overall process needs.
Occasionally the calculation is wrong, or some outside situation (geopolitical event, natural disaster, overly warm or cold winter, and the like) throws a wrench into the estimations. A short-term spike or dive takes place as a result. That is not, however, the harbinger of some “brave new world” coming.
Third, there is the most fundamental reason of them all. In normal markets, the aggregate usage of energy will rise. This is especially true when you consider that two-thirds of the world’s population is poised for rapid economic expansion.
Despite what some want you to believe, demand is not a function of Western Europe and North American needs. It hasn’t been for some time.
Demand has been suppressed because of the economic stagnation on both sides of the Atlantic. But that has been coming to an end. And the increase in overall global demand continues to demonstrate an upward pressure.
I hasten again to note that this is not going to result in an overheated short-term market but is likely to result in a rising price level nonetheless. However, here is an emerging new factor in all of this.
As you might have guessed, this is a balance issue. It is, in fact, the most important element moving forward. Energy prices-and share values of companies involved in the sector-are going to be influenced by a new dynamic.
This involves an expanding range of energy sources that will be integrated into a developing system of production, processing, and delivery.
This may be the most significant change to hit energy investment in decades. And there are going to be some massive profit opportunities developing.
But to maximize our profits, we need to be ahead of the curve, and begin investing in certain places before others have the insight to do so. Companies I’m about to start mentioning in my advisory services Energy Advantage, Energy Inner Circle, Energy Sigma Trader, and Micro Energy Trader will benefit from all of this.
So let others bang the drum of old hypes and tired fears. We are simply going to ride the new wave and make some serious money.
I’ll be laying out some of the strategies to help us get ahead in the coming weeks.
Related: SPDR Select Sector Fund (NYSEARCA:XLE), ProShares Ultra DJ-UBS Crude Oil (NYSEARCA:UCO), United States Oil Fund LP (NYSEARCA:USO), Chevron Corp. (NYSE:CVX), ConocoPhillips (NYSE:COP), ProShares UltraShort DJ-UBS Crude Oil (NYSEARCA:SCO).
Written By Kent Moors, Ph.D. From Money MorningDr. Kent F. Moors is an internationally recognized expert in global risk management, oil/natural gas policy and finance, cross-border capital flows, emerging market economic and fiscal development, political, financial and market risk assessment. He is the executive managing partner of Risk Management Associates International LLP (RMAI), a full-service, global-management-consulting and executive training firm. Moors has been an advisor to the highest levels of the U.S., Russian, Kazakh, Bahamian, Iraqi and Kurdish governments, to the governors of several U.S. states, and to the premiers of two Canadian provinces. He’s served as a consultant to private companies,financial institutions and law firms in 25 countries and has appeared more than 1,400 times as a featured radio-and-television commentator in North America, Europe and Russia, appearing on ABC, BBC, Bloomberg TV, CBS, CNN, NBC, Russian RTV and regularly on Fox Business Network.
Moors is a contributing editor to the two current leading post-Soviet oil and natural gas publications (Russian Petroleum Investorand Caspian Investor), monthly digests in Middle Eastern and Eurasian market developments, as well as six previous analytical series targeting post-Soviet and emerging markets. He also directs WorldTrade Executive’s Russian and Caspian Basin Special Projects Division. The effort brings together specialists from North America, Europe, the former Soviet Union and Central Asia in an integrated electronic network allowing rapid response to global energy and financial developments.
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