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A Look at the Energy Sector

sectors

If I were to be asked what the most successful sector of our economy were in recent months, I’d say that it was the Energy sector. The companies are making boat loads of money, the process (whether you agree with fracking or not) being used is extracting oil from fields that a decade ago were considered unretrievable, and in the distant future our country could conceivably be energy independent – we have already topped Saudi Arabia as the top oil producer in the world. Being energy independent is a hugely critical component of improving our national security and economic sustainability.

Then, you look at the graph above – and you see that over the past three months, the stocks of the companies in the energy sector have been by far the worst performers in the stock market.

Take a look at a selection of well-known energy companies stock price performance over the past three months:

energy

If that isn’t an ugly chart I don’t what one is.

So is there a strategy here? Yes – at some point, these companies become a screaming BUY – the question is when. To determine that, you have to figure out where the bottom in the price of oil will be.

Realistically, you want some sort of fundamental reason and some technical reason to hang your hat on.

From a Fundamental perspective, I listened to a news conference by an OPEC Oil Minister (from Abu Dhabi, maybe) and he said that oil would bottom near $78 per barrel based upon their analysis. Today it closed around $80.60 – so we are pretty close from a fundamental perspective.

For the Technical perspective, lets look at a graph:

wtic-annotated

This is a ten-year graph of West Texas Intermediate Crude. You can see I’ve annotated it with a horizontal line a bit below $80 per share. You can see that the line originates in the early/mid 2000’s as a resistance level which was ultimately broken to the upside in the big oil boom, then again broken to the downside in the big oil bust, then has acted as support in recent years.

Based upon these two factors, we are likely fairly close to a near-term bottom in oil prices which should put a floor under the prices of oil stocks and present a buying opportunity.

However, there is never a guarantee – so our strategy is to start adding to shares of some of our favorite companies, and if they go down, buy some more. It’s not rocket science, but it is a proven strategy that has worked over the decades when shares of companies so significantly underperform the rest of the stock market.

We have started to nibble on some shares and will likely continue to add them at these reduced levels – its not likely to be a big winner in the near-term but in the fullness of time buying shares of a quality company like Apache at $73 when they were just at $105 several weeks ago will pay off for our clients.

Mark