|
Published: November 5, 2010
Like every
investor, I try to read voraciously to get an edge. I'm always
on the lookout for investment angles that haven't gotten much
press but could eventually turn into a market-moving event. So
my ears perked up last week when I saw that hedge fund traders
have recently been aggressively buying energy
futures, betting that we'll soon see oil move up to $100 a
barrel. In subsequent days, it's become easier to see the signs
of $100 oil popping up on people's radars.
For example, on Monday, Saudi oil minister Ali Naimi suggested
that oil prices could move up to $90 without hurting global
economic growth, up from a previous perceived ceiling of $80.
That's led some to speculate that OPEC will try to maintain
production at current levels even as signs are emerging that oil
demand has begun to pick up.
Economic growth in emerging markets like Brazil and China
remains robust, which led to a 1.4 million barrel jump in the
third quarter, according to the International Energy Agency (IEA)
and a 980,000 barrel
uptick in Western Europe and the United States. Any further
uptick in global demand could push oil demand back up to -- or
above -- supply levels.
Analysts at Merrill Lynch see $100 oil by early 2011 for a more
prosaic reason: They believe that the U.S. Federal Reserve's
plan for quantitative easing (QE2) will weaken the dollar and
raise the price of commodities, particularly gold, silver and
oil. The recent move in the dollar is a possible harbinger of
things to come, according to Merrill: "We believe that oil is
only starting to reflect a weak U.S. dollar against G10, leaving
room for oil price rises as emerging market currencies
strengthen against the U.S. dollar."
Make no mistake, $100 oil is not nearly as lethal to the economy
as $140 oil was a few years ago, but it still creates serious
headwinds and tailwinds in a range of industries. Here a just a
few impacts:
- Airliners see a sharp
drop in profits next year as rising jet fuel costs cannot be
offset by commensurately higher fares. Carriers have already
pushed through steady price increases in the past 18 months,
but are pushing the limits of demand elasticity. Notably,
while many carriers were nicely hedged against rising fuel
prices a few years ago, they have largely bypassed hedging
activities in this cycle. If they are to act, they should do
so soon.
- Sales of high-margin SUVs
and pickup trucks would likely stall out once again after recent
signs of a demand uptick that underpins rising profit forecasts
for Ford Motor (NYSE: F) and other auto makers in 2011.
- Consumers would likely feel
a pinch at the gas pumps and also at the grocery store, where
rising transportation costs would lead to a rebound in food
price inflation.
- Road-based freight transporters such as
Con-Way (NYSE: CNW),
Arkansas Best (Nasdaq: ABFS) and YRC Worldwide (Nasdaq: YRCWD)
have only recently achieved major cost cuts that help to narrow
the cost gap between themselves and the rail-based freight
carriers. All of a sudden, $100 oil swings the pendulum clearly
back in favor of rail haulers like CSX (NYSE: CSX), Union
Pacific (NYSE: UNP) and Norfolk Southern (NYSE: NSC).
- The United States is
also a potential loser. Despite heated rhetoric from both
parties, we still have yet to meaningfully wean ourselves
off of imported oil. And $100 oil simply expands our trade
deficit.
A green rebound?
Of course, higher oil prices are just what the clean energy
industry could wish for. Solar and wind providers have been
highly dependent on erratic government policies to support
demand and have thus far come away with nothing in terms of a
carbon tax that makes their technology comparatively more
cost-effective. Yet some projects that were not feasible at $75
oil without subsidies suddenly become more feasible in the face
of $100 oil. The PowerShares WilderHill Clean Energy ETF (NYSE:
PBW), which surged above $25 briefly in early 2008, now trades
below $10, reflecting the recent period of relatively cheap
fossil fuels.
If oil moves back into triple-digit territory in 2011, the
timing would prove perfect for Brazil, which is in the process
of developing massive new oil fields through its quasi-national
Petrobras (NYSE: PBR) oil company. Shares of Petrobras came
under pressure this summer after it needed to sell massive new
blocks of stock to fund development. As a result, shares are
-35% off of their 52-week high.
Lastly, a wide range of natural gas companies stand to benefit
from surging oil. For starters, it would increase demand as any
power plants that can switch between oil and gas make the move
to gas. Second, it increases the likelihood that auto makers
roll out more natural gas-fueled cars. Honda (NYSE: HMC) is an
early leader in this area, Daimler Benz is reportedly set to
follow suit, and other auto makers may do so as well. If enough
do so, then natural gas prices will finally start to rebound as
demand builds.
Lastly, Clean Energy Fuels (Nasdaq: CLNE), which operates
natural gas fueling stations, and Westport Innovations (Nasdaq: WPRT), which retrofits big truck engines to run on natural gas,
would also be clear beneficiaries.
Action to Take --> Energy has been off of investors' radars in
2010, but that may not be the case in 2011. It pays to keep an
eye on developments in the energy markets: The U.S. economy can
tolerate $100 oil -- $120 oil is another story. If oil prices
start creeping up, you should think about rotating out of stocks
in the losing areas I mentioned above and into some of the ideas
I mentioned earlier.
-- David Sterman
Staff Writer
StreetAuthority |
