Paul, I posted this recently back on the CFZ, but I thought the gang here would find it interesting. The sector leader of the natural gas companies, APA, is making new highs, and many of the other large caps are showing strength in a weak market.
Energy : Part 1. 2000-2001 - A proxy for 2003-2004.
In the span of about 14 months, from Early 2000 to Spring of 2001, the XNG rose from 120 to 260, and the OSX from 75 to 140. It was a breathtaking boom, comparable in my mind only to the gold run beginning in late 02. A similar opportunity in energy is at hand.
What was the prime mover of the 00-01 boom? Soaring NG prices.
Benifitting from high commodity prices were first the explorers and producers of energy (e&p) - names such as Apache, Anadakro (represented by the xng). The direct recipient of surging cash flow were the the oil service companies (osx) - Diamond Offshore, Transocean, etc. The end result was a boom in both the explorers and in the oil service companies. This boom peaked in the winter of 2001, where soaring ng prices precipitated demand destruction and mediated a ng crash (and along with the commodity, the xng & osx).
Because of both demand destruction and a modest increase in ng supply as a result of a drilling boom, NG builds came in larger than usual in the Spring of 2001, prompting me to perform an abrupt reversal of my position on energy as reflected in my May 5th post stating one should "short everything energy in sight." A crash began in late May 2001 and completed its carnage in fall of 02.
We are now again in the first innings of a bull, where commodity prices have risen in response to concerns over ng storage. Well documented is the fact the supply has again fallen, as it did in 1999-2000.
oilviews.homestead.com.
But in the first innings, equity values have not yet begun to fully appreciate that such a fall in supply has implications for commodity prices well into 2003. Current valuations suggest some market disbelief that commodity prices will remain high beyond this season. Using 2000 as a proxy, the more likely course of events will be smaller than normal builds and increasing concern over winter 2003-04. That is the recipe, as it was in 2000, for a energy equity bull. |
