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Summary

  • Future long-term energy demand is set to grow substantially, thanks to emerging economies.
  • Seasonal short-term demand effect: US vehicle miles are on the rise, driving US gasoline prices higher.
  • Short-term risks: While oil production in troubled Libya, Syria, Nigeria is already suffering, Iraq is the big risk now (today the 2nd-largest OPEC producer).
  • The Oil & Gas sector (Integrated, Exploration/Production, Services, Infrastructure e.g. MLPs, LNG shipping) continues to outperform stock market.
  • The Powershares DB Commodity Index ETF (50% in oil-related commodities) is a cheaper hedge over time than the VIX.

Oil As a Strategic Long Holding

Here are some reasons (in chart form) for my assertion that the Energy sector in general, and Oil & Gas in particular is still an excellent long-term investment theme for some time to come.

What is more, there are also a couple of short-term drivers to drive oil-related commodity and share prices higher to boot...

1. Seasonal Effect - US Gasoline Prices Break Out For Summer (Driving Season)

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Source: St. Louis Fed, Bloomberg

Energy: The Long-Term View

2. Long-Term Oil Driver: Consumption Growth from China, India etc.

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Source: US Energy Information Administration

3. So Far, Non-OPEC (North America) Production Growth Has Kept Up

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Source: US Energy Information Administration

4. But Will Be Tough to Keep Up With Demand...

Source: US Energy Information Administration

Energy: Short-Term Risks

5. Civil War Has Decimated Production in Libya, Syria, Terrorism Hurting Nigeria too

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6. Iraq, Already OPEC's 2nd-Largest Producer at 3.3 Million Barrels/Day, Is Forecast Huge Production Growth

Source: oilprice.com

7. With ISIS Advances, Iraqi Civilian Deaths Now Highest Since 2007

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Source: iraqbodycount.org

8. OPEC Oil Production Disruptions Are Now At Their Highest in 4 Years

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Investment Conclusions

9. Buy US Integrated Oil, Oil Services, MLP Stocks on Weakness

(JPMorgan MLP ETF: US code AMJ, other similar MLP ETFs AMLP, MLPX; iShares Oil Equipment & Services ETF IEZ, other similar ETFs OIH, XES; iShares Oil Exploration & Production ETF XOP)

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Source: Bloomberg

10. Buy US Oil, LNG Shipping On US Export Growth

(Guggenheim Shipping ETF SEA; Teekay Corp. TK)

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Source: Bloomberg

11. PowerShares DB Commodity Index ETF (NYSEARCA:DBC) Cheaper Hedge Than VIX

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Summary

  1. The oil sector remains a key long-term investment theme for me
  2. World energy demand is set to continue to grow fast
  3. World oil & gas production growth may struggle to keep up; suggesting a solid backdrop also for renewable and nuclear energy
  4. Short-term: Geopolitical risks to OPEC oil production (principally Iraq)
  5. US, European oil stocks to continue to outperform - Shale oil & gas exploration & production (e.g. the FRAK ETF), oil services and MLPs
  6. The PowerShares DB Commodity Index ETF one way to play higher Brent crude oil, gasoline prices, while hedging against oil-related risk-off market moves. Certainly cheaper to hold than implied volatility ETFs like VXXand VXZ.
Source: Buy Into Black Gold, Now And For The Long Term!