Consistency is the hobgoblin of inattentive investors. Last month, I touted agricultural commodities and waved energy aside. That was then.
Now Saudi Arabia has laid a $50-a-barrel floor under oil prices that only it can enforce -- at least to the degree supply-demand forces can be managed. Combine that with arctic cold from the Great Plains to the Carolinas, and we are reminded that energy is a theme with a future.
"We think oil probably has bottomed," says Marshall Adkins, managing director of energy research for Raymond James & Associates. Production is down, demand is up, and that's not all. "As you move through the year, inventories will trend down more than the market currently thinks, so that will tend to support oil prices, particularly in the back half of the year," he says.
A continued climb
For market timers, now is probably too soon to plunge into petroleum; my colleague Jim Jubak counsels investors to "watch and wait" for oil bargains.
But for more-strategic investors, the bargains already exist. For most investors, I think a natural resources fund is the optimal way to participate in oil. Such funds also own other commodities, like paper products and gold, so they're less volatile than energy-only funds.
But you can pick portfolios anywhere along the commodity spectrum, from the most narrow to the broadest.
The most direct way to own energy is through exchange-traded funds (ETFs) focused strictly on the oil patch. But it's also the riskiest.
The trend for the Major Integrated Oil & Gas Index (MJROILGAS), for example, is clearly up, but the path is tortuous. And this is actually a somewhat diversified index, embracing, in addition to commodity prices, natural gas as well as the refining and distribution of petroleum.
Some of the two-dozen-and-growing ETFs that invest in energy focus as narrowly as U.S. Oil Fund (USO, news, msgs) and iPath Goldman Sachs Crude Oil Total Return Index (OIL, news, msgs), both of which track the price of futures contracts for West Texas intermediate light, sweet crude.
Others target particular niches within the sector, such as PowerShares Dynamic Energy Exploration (PXE, news, msgs), Oil Service Holders (OIH, news, msgs), SPDR S&P Oil & Gas Equipment & Services (XES, news, msgs) and SPDR Oil & Gas Exploration & Production (XOP, news, msgs).
I think funds such as these are best left to experts in the "awl bidness." There are plenty of more-diversified ETFs for the less-expert.
Too many, in fact. There are nearly a dozen that attack energy by varying strategies and degrees. By far the largest and most liquid, with assets of $3.93 billion, is Energy Select SPDR (XLE, news, msgs). It owns the energy names in the S&P 500 ($INX), with 44.7% of its assets in the three biggest companies, ExxonMobil (XOM, news, msgs), Chevron (CVX, news, msgs) and ConocoPhillips (COP, news, msgs).
A bit less risk
More-diverse portfolios also abound, and this is where I shop for exposure to the group. These portfolios typically have "natural resources" rather than "energy" in the name.
The ETF I like is iShares Goldman Sachs Natural Resources (IGE, news, msgs), which has about 75% of assets in companies from integrated oil and gas companies like Chevron to exploration companies, drillers and oilfield services.
Video on MSN Money: Jubak's Journal
Jim Jubak
Video: Are the Saudis driving down oil prices?
Why is the price of oil so low? MSN Money's Jim Jubak says Middle East politics are currently driving down the cost of crude. As Saudi Arabia tries to put a stranglehold on Iran by cutting oil prices, the oil-consuming population benefits from the temporary drop in cost.
The other assets are spread out among gold miners, paper manufacturers and other firms with exposure to industrial commodities. As an index fund, this ETF portfolio is rigid. I prefer active management so the people handling my investment are free to minimize areas they don't like and focus on those they do.
I happen to own T. Rowe Price New Era (PRNEX, news, msgs), but manager Charles Ober was traveling abroad last week and I couldn't reach him. Instead I turned to Michael Hoover, manager of Excelsior Energy & Natural Resources (UMESX, news, msgs), another excellent fund with a broad mandate in resources.
Like Jim Jubak, Hoover is a bit cool to energy at this moment. "The market is searching for an equilibrium price," he says. "We have too much (natural) gas in storage, and we think gas prices could be soft after the winter, and oil prices might be a bit soft prior to the summer driving season, so we see better buying opportunities in March and April."
Range bound, in a good way
So Hoover's fund, which would devote 85% of assets to the oil patch if he were bullish, instead has 75% there, with much of the balance in miners, both of precious and base metals.
Today's range-bound oil prices are really a boon for the industry as well as the economy, Hoover says. "If prices are too high for too long you bring about recession, which would kill demand for oil and gas as well as kill the economy," he says. At current prices, "energy stocks can do fine in that environment."
In Wall Street parlance, Jubak is a bottom-up stock picker and I am a top-down theme player. Jim focuses on company fundamentals. I leave that arduous work to fund managers. I try to align my investments with what I think are broad trends at work, and natural resources fits neatly into my view that global demand for industrial inputs, including oil, is outpacing global supply.
"More than half the world has never driven a car," notes a recent U.S. Trust research report on energy. China, in particular, is taking to the road, however. According to a report from U.S. Trust, between now and 2030 demand for oil will increase 1.3% annually, to 5.58 billion tons, far more than any other fuel.
Tomorrow might present a better opportunity to buy into that growth than today, but the theme won't be any better next month or next year. |
