Energy Prospects after the Fiscal Cliff

by | published January 2nd, 2013

Marina and I are still here in the Bahamas where our Internet and TV reception has been very sporadic over the past two weeks. It started improving yesterday, just in time for us to watch our favorite situation comedy.


After much political jockeying and self-serving speeches from a largely empty floor, the House finally voted to pass the Senate’s stopgap fiscal cliff Band-Aid. After waves of politically aggrandizing “drama,” that approval came barely 21 hours after the upper chamber had passed it in the early morning hours. The nation had technically fallen over the cliff after midnight January 1, but the holiday spared anybody inside the Beltway the problem of determining what that actually meant.

America has dodged another political bullet. Welcome to the ongoing way of governing in Washington – brinksmanship.

Income taxes are going up for individuals making $400,000 or couples earning $450,000 or more; unemployment compensation has been saved; the sequestration of automatic expenditure cuts has been delayed. But two months from now, when the debt ceiling comes up for another debate, we will head right back into crisis mode.

In the long-term view, nothing has changed. In the interim, we are going to make some money. The energy sector will almost certainly be leading the charge up today as the markets rally.

How long that advance continues is an open question. But there is one overriding factor in all of this.

And the sooner you know what it is, the sooner you’ll be ready to profit.

A Rising Tide Will Not Lift All Boats

The post-cliff bump for energy stocks is not going to happen uniformly across the board.

Natural gas prospects for both extractors and midstream providers (gathering, initial processing, pipelines, terminals) are likely to remain subdued unless the winter turns colder; meanwhile, there will be little stimulus for solar, wind, or biofuels in the absence of renewed government subsidies.

However, the condition of other energy shares, especially those connected to the production, transport, and refining of oil and oil products will likely move up, some by significant amounts.

The reason is rather direct. A range of considerations have restrained the prices of both crude oil and processed oil products. But the main restraint has been concerns over global demand.

Now some of those misgivings have been greatly exaggerated. Nonetheless, with fears of another recession in the wings, nobody from producers through refiners to distributors and retailers has been prepared to conclude a spike in demand was on the horizon.

The prospects for such a spike center on broader economic developments. There have been few signals emerging to justify expectations on a demand surge. Over the weeks after the election, with a fiscal cliff fast approaching, uncertainty about tax rates and spending cuts, reluctance to make new hires, and a lethargy in both investor and consumer confidence continued.

Most of these elements are still here. But at least until the beginning of March, the specter of a self-inflicted economic wound is off the table.

So let’s take what we can get now and position the portfolio accordingly. Today, markets will overreact to early morning and late evening reprieves from first the Senate and then the House.

Stock values will begin the New Year on a nice upward ride. Repositioning your portfolio today makes no sense (although taking some profit might). We need to wait on prioritizing movements until the dust settles. That may happen rather soon, since a fair amount of investor expectations on a Congressional settlement was already priced into the market by the end of 2012.

Therefore, that means we outline a strategy in my next column coming on Friday.

There are two overarching observations moving forward. First, as I observed during the fourth quarter, energy shares have been underpriced. There is now upside potential that will be released by the avoidance of the cliff.

Second, there is a general balancing principle that should be kept in mind as you move from one crisis (the one averted last evening) to the next (the debt ceiling war two months from now).

A select list of battered down shares and oil prices are expected to rise for a few reasons.

  1. Geopolitical tensions rising again in the Persian Gulf;
  2. Recurring concerns over actual global crude supply; and,
  3. Leading bellwether figures point toward a rise in economic activity.

Meanwhile, the balancing necessary will involve particular upstream and downstream oil companies, specifically positioned service providers and exchange traded funds. We will be looking here at several triggers that I will suggest you watch over the next several weeks. These will parallel moves up by designated energy segments.

However, remember that the volatility cycles in energy are also intensifying.

Those cycles have the potential to move shares up or down very quickly. That means a strategy needs to be particularly sensitive to short-term fluctuations in both performance (the technicals) and perception (investor emotions).

I will begin laying this out on Friday.



Editor’s Note: As Kent noted, there is some real opportunity to profit after Congress avoided the Fiscal Cliff. And the best way is by exploiting a story and stocks that no one is talking about… This is big. To learn more, click here.

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  1. enthusceptic
    January 3rd, 2013 at 10:37 | #1

    The fiscal cliff fiasco is such a shame that it conjures up in my mind a picture of the lawmakers with egg mixed with something that stinks worse than a skunk running down their faces. Whatever makes any adult think that when one procrastinates the world will give you no new challenges when deadline arrives?
    I ask this on behalf of the Sandy victims. I got a bump of 3% on my portfolio when the tiny band aid was finally put on the US fiscal problems, but I would gladly give up that if it could help the Sandy victims. The sad fact is that I and many others all over the world would have gotten a bigger upwards bump if US lawmakers had done their job in a timely fashion.
    Almost all my shares are in Norwegian stocks, and all are bought on the Oslo Stock Exchange. That’s why I get involved in US affairs. That country had something like pneumonia a few years ago, remember?…and as the saying goes, when the US cathes something, the rest of the world gets affected.
    I think as many US citizens as possible should call or write to their Congress person and convey my message, and ask them to wake up and smell the coffee, which has already been served and will be cold and poisonous if they don’t drink it very soon. Then tell the president and the other “leaders” in this soap opera or telenovela to get ahold of the biggest whip and a cattle prod – preferably electric – and corral the “cattle” so they will moo when appropriate
    Normally I believe that questions are more useful than opinions, but this time I make no apologies. I write this because I believe that many have similar opinions as myself.

  2. joe roseville ca.
    January 3rd, 2013 at 11:45 | #2

    what is the name of the company that makes the new multi head well driller called the “octopus”. that seems like a company to put into our portfolio to make alot of money.
    thanks joe
    roseville, ca.

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