Avoid the Hype and Break Ahead of the Energy Curve
This week, another batch of oversimplifications attempted to explain a significant decline in energy stocks. Excuses ranged from declining demand to shale gas and oil gluts. Others pointed toward a general market Armageddon.
But you and I know no better than to believe this hype.
The S&P closed yesterday 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.
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.
We have been experiencing cycles of volatility, especially in the energy sector. But this is hardly going to translate into a pricing dive for several reasons.
Energy demand is not going through the floor any time soon. Yes, prospects for either economic recovery or another recession will affect projected future energy requirements. But neither will generate a significant move in one direction or the other – unless there is tangible data to sustain the opinions.
These days, the projections are once again up rather than down, but in what I have called a “ratcheting” move. For example, at open today NYMEX crude rates were up 9.3% for the month and over 1% for
the week, but are likely to be down today. Overall, they are pointing up but not without internal moves in the other direction.
The temptation to translate immediate snapshots of the energy sector into prophecies of imminent doom is a particularly popular one among a certain clique of simplifiers. The problem is this is not panning out in actual stock values or market moves.
This approach is simple enough…but it's wrong.
Another theme recently unveiled is the conclusion that massive shale gas and shale (actually tight) oil are about to depress energy prices through the floor worldwide.
It sounds scary on the surface, but it just isn't warranted by market reality.
This argument is wrong for three very basic reasons.
And once you learn them, you can stand to profit from the biggest energy trend in decades.
Three Reasons Why The “Experts” are Wrong
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 balancing capacity 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.
[Editor's Note: As Kent mentioned, now's the time to get ahead of the curve. And there's another opportunity that no one's talking about... and only investors prepared for THIS shakeup will profit. To learn more, go here.]