Market Pulse: On the energy sector | TahoeDailyTribune.com

Market Pulse: On the energy sector

David Vomund
Market Pulse

David Vomund

In 2008 nobody wanted to buy real estate and new home building came to a halt. The opposite is true today. That's because in 2008 the need for housing rose even as the demand for housing fell. A similar cycle is happening in the energy market.

Two years ago the price of oil was $28, but as prices fell global demand was increasing. No one wanted energy stocks then, but now oil is $66 and it seems almost every analyst has turned bullish. They are chasing performance.

The Energy SPDR (XLE) is up 13 percent from its March low while Oil & Gas Exploration & Production (XOP), which measures the more price-sensitive exploration and production companies, is up 20 percent.

Demand for crude is and will be steadily increasing thanks to the emerging markets and global supply, while growing due to U.S. shale production, may soon become inadequate.

Bahrain's energy minister said recently that years of under-investment (by trillions of dollars) have led to rising prices and potentially a supply shock whether caused by events in Libya, the collapse of Venezuela's oil industry or something else.

President Trump's decision to exit the Iran deal had a small but upward impact on prices. One reason the impact was small is that sanctions, which could take one million barrels a day off the market, will be imposed 3-6 months from now, not immediately.

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This is similar to the steel and aluminum tariffs. These tariffs were announced with much fanfare, but they too weren't to take effect for months. A lot can happen in the meantime.

There is something for everyone in this sector. For more conservative investors there is BP and Exxon Mobil. Both have dividend-growth potential.

More speculative plays are volatile but should have the biggest percentage gains as the bull market lumbers on. Chesapeake Energy and QEP Resources are my favorites in this category. Chesapeake is the second largest natural gas producer and QEP is a pure play on the Permian basin.

Finally, for high yields look to Enbridge (6.5 percent yield) and Kinder Morgan (5.0 percent yield). These are the largest North American infrastructure companies and together control much of the movement of oil and natural gas. I like and own them, too.

Energy stocks have long cycles, both up and down. We are early in an up cycle now.

David Vomund is an Incline Village-based fee-only money manager. Information is found at http://www.VomundInvestments.com or by calling 775-832-8555. Clients hold the positions mentioned in this article. Past performance does not guarantee future results. Consult your financial advisor before purchasing any security.