by John Nyaradi
With this week’s unrest in Libya, the energy markets have been big news as the price of oil went parabolic early in the week and then oscillated wildly as the news out of the Middle East took investors on a wild roller coaster ride of volatility. While the rolling revolutions in the Middle East will be making short term headlines, the underlying, more sobering fact is that energy will likely be making headlines for years and has the potential to impact global equities markets and even threaten the very basis of the American way of life.
Chart courtesy of Stockcharts
The chart above demonstrates price action in West Texas Intermediate Crude, the benchmark for pricing in the oil patch, and the recent unrest in Libya is quickly apparent with just a glance at this chart.
Things are likely to remain volatile in the energy markets over the short term as revolution rolls across the Southern Mediterranean, however, going forward, investors need to take a look at oil in particular, and energy in general, because as I outline in my book Super Sectors, energy is likely to be a super sector going forward for as far as the eye can see.
Taking a look at the big picture, the supply/demand equation in the energy sector is very precarious and dangerous and the economic, political and social impacts of energy and its pricing and use will be a major factor we’ll all be facing on our economic landscape in years to come.
The news is bad on the supply side as there’s little question that global oil supplies have peaked and are in decline. Looking back, most of the new, significant crude oil discoveries were made in the 1960s and have been in decline for quite some time and most experts agree that global oil production peaked in the mid 2000s.
The view on the other side of the economic equation of supply and demand is equally grim as we see ever increasing demand for energy coming from all corners of the world.
China’s rapid growth curve is a well known phenomenon and India is right behind. The growth of these two countries alone will severely strain world oil supplies in the coming years, not to mention growth in places like Brazil, Vietnam and the Middle East.
The United States imports three quarters of its daily oil needs and is by far the world’s largest user of fossil fuels. This puts us in an extraordinarily weak position, both economically and politically.
If prices rise, this will further crimp the American economy as so much of our everyday life is tied to oil. Think about what life will be like in your neighborhood with oil prices locked in the triple digit range forever. Higher oil prices will likely translate into higher inflation and less disposable income, because every dollar we put into energy is a dollar we don’t have to spend on other things like cars, houses, vacations, etc.
There will be numerous ways for investors to participate in the energy super sector over the coming years, some obvious and some not so obvious.
Upfront, of course, there are numerous Exchange Traded Funds that directly track the price of oil and that could be used by investors looking for exposure to the oil market.
Commodity futures also offer the potential for profits or losses from the rise or fall in the price of oil and other related products.
A different take on the energy super sector is to go “long” countries that are net exporters and so likely to profit from the economic and geopolitical shifts we’ve discussed or to “short” those countries that are likely to come up on the short end of the stick if energy prices continue to rise and supplies remain constrained.
Everyone seems to agree that energy will be a major factor on the world’s political, economic and military landscape for many years to come, maybe forever. Libya is making news today but the strategic importance and the seismic dynamics of energy supply and demand will create enormous shifts in opportunities and centers of power as these forces play out against one another in the years ahead.
Disclaimer: No positions in ETFs mentioned. Wall Street Sector Selector actively trades a wide range of exchange traded funds and positions can change at any time.