| Fellow Investor, It's time to get serious about energy investing. Until a couple of years ago, soaring oil and natural gas prices made any energy stock pay off. Not anymore. These days, the energy sector is still profitable, but it's become very complex, with a range of issues buffeting stock prices and making it difficult to know where to put your money. That's why depending on the advice of professional energy investing analysts is so important—especially for you, the self-investor. Below is an article that recently appeared in The Energy Strategist investment advisory newsletter. Normally only our paying subscribers would see it. But it's our gift to you today. This article is a perfect example of the timely, well-written advice you would receive twice a month—if you subscribed to The Energy Strategist. Enjoy! Low Low Gas Prices Are Not a Plot Ignore claims of political manipulation. The dive in crude and shift to cheaper winter gasoline are the real drivers of the discounts at the pump. Same Song, Different Party You may have noticed that, 1) it is election season and, 2) gasoline prices are declining. This has some pundits attempting to connect the dots to imply that somehow President Obama is manipulating gasoline prices in order to win elections. It doesn't matter which party is in office, these accusations always seem to pop up at election time. It happened when Clinton was in office, it happened when Bush was in office, and now it's happening while Obama is in office. The only things that change are the party that is being accused of manipulating prices, and the partisans defending or accusing that party. This year it's Fox News doing the accusing, and MSNBC defending. But as I have pointed out many times, there are fundamental, predictable reasons for the tendency of gasoline prices to decline at this time of year. This happens most years, even in non-election years. Gasoline prices fell at this time of year in 2011, 2012, and 2013 — two of which were non-election years. It is just that the political accusations only arise during election years. Why Gasoline Declines in Fall Gasoline prices fall at this time of year for three reasons. First, summer driving season is over, and demand is typically declining at this time of year. At the same time, the gasoline specifications switch over to a winter blend that is cheaper to produce. Further, these winter blends contain a higher percentage of an ingredient (butane) that is available in greater abundance. See my article Why Gasoline Prices are Falling for a more thorough explanation of this issue. So we have lower demand, lower production costs, and greater supplies all converging at about this time every year. This year, add in the fact that oil prices have retreated sharply since summer, and the confluence of factors has driven gasoline prices to their lowest level in four years. In some years, extraordinary circumstances can override this general tendency of price declines in the fall. Hurricane Katrina in 2005 took a large fraction of oil production offline in the Gulf of Mexico at a time that the oil supply was already tight, and this drove oil prices sharply higher. So that year we didn't see the typical fall price decline. The President Is Not an Energy Tsar Presidents can enact policies that influence the price of gasoline in the long term, but there are only a couple of ways a president can influence short-term gasoline prices, and both are very public. A president can announce a release of crude oil from the Strategic Petroleum Reserve (SPR) to flood oil into the market and depress prices. President Clinton actually did this leading up to an election, so the charge that he attempted to manipulate prices has some basis. A president can also convince Congress to temporarily lower the federal gasoline tax in order to reduce gasoline prices. Again, that would be an obvious attempt to gain political favor if done just before election, and it is a gimmick that John McCain and Hillary Clinton both proposed when they were running for president. Who Benefits? Regardless of the cause, oil and gasoline prices are falling, and that's boosting the economy by giving consumers more discretionary income just ahead of the holidays. Retailers should be among the biggest beneficiaries. On the other hand the stocks of companies that produce oil and gas are getting hammered, while those that rely on oil, natural gas, or refined products (e.g., gasoline) as inputs should see earnings improve. This includes airlines, trucking companies and marine shipping. Also, as I have pointed out previously (see Rocket and Feathers), within the energy industry oil refiners usually benefit from falling oil prices, because they are generally able to widen their margins as oil prices fall. In fact, many refiners are now reporting earnings that are much better than expected. For example, last week refiner Tesoro (NYSE: TSO) reported adjusted earnings of $3.06 per share, much higher than the consensus estimate of $2.15, and far ahead of the year-ago quarter adjusted earnings per share of 44 cents. This week Valero (NYSE: VLO) also handily beat estimates, more than tripling their profit from the same quarter in 2013. By the same token, integrated oil and gas companies will generally outperform pure oil and gas companies when oil prices are falling, because their refining divisions will help offset the decline in upstream operations that results from falling prices. Conclusions Oil and gasoline prices are falling, for reasons much more obvious and rational than political manipulation. Such conspiracy theories have no basis in fact. Gasoline prices generally decline in the fall, and conversely rise in the spring just ahead of summer driving season. Investors should take heed of the industries that will benefit from the decline in energy prices. Although I am extremely bullish on the long-term prospects of the energy sector, the sector is cyclical. It is important to pick your entry points during the down cycle. There are times that the sector will underperform. As a result, even though I always keep money in the energy sector, over 70% of my own portfolio is invested outside the sector. Within the energy sector, the refiners are presently outperforming the rest of the sector.
To your investing success, Robert Rapier, Chief Investment Analyst You're receiving this email at benjamart.ss.stock@blogger.com because you subscribe to an Investing Daily e-letter. Never miss an email. To ensure delivery directly to your inbox, please add postoffice@investingdaily.com to your address book today. If you no longer wish to receive emails from Investing Daily, please go here. Preferences | About Us | Contact Us | Privacy Policy Copyright 2014 Investing Daily. All rights reserved. |
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