Energy Opportunity

Oil futures had a knee-jerk reaction today as the market factored in a decline in air travel and jet fuel consumption.  Since many hedge fund managers trade energy ETF’s as if they were proxies for oil futures, this may provide an opportunity.  The reaction is based upon a directional decision, not an assessment of the fundamentals.

The reasons for selling include factors that are all subject to question, something I described on our energy site.

The opportunity for investors depends upon how one views the upstream versus downstream energy companies.  The behavior follows the Cobweb Model, where reaction depends upon how the companies needing new production view the future of demand.

The next question is how to interpret the behavior of the "big uglies" as some call the integrated oil companies.  There is evidence that their announced capex expenditures may not lead to major increases in supply.

We can review this by looking at what major integrated oils are actually doing on capex.  ExxonMobil is a good example.

My conclusion is that E&P companies, despite the recent lackluster performance, are only reflecting oil prices of $40/barrel or so.

Investment in ETF’s has distorted this market, presenting an opportunity to investors who understand how upstream and downstream really works.  Full disclosure — my funds and investors have some energy positions in these holdings.  This has been a good move — at least until very recently.  Over the last two years any decline has provided a good opportunity to add.  Since the fundamentals look the same, I seek to add to my positions with some new names.

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