Energy Vs Commodities
While supply and demand are powerful forces in economics and markets I read over the weekend that is is better to invest in demand driven rather than supply driven opportunities.
Random thoughts on energy and commodity investing.
Is oil and gas demand or supply driven? Peak oil theory suggests it is supply driven. The price of oil is more reflective of supply than demand. Oil shocks have occurred due to supply reasons.
Commodities appear to be demand driven. Supply is still considered endless, thus it is demand driven.
Short term outlook for energy is down. Have we seen the bottom? Doubtful. Are value investors early to the declines? Time will tell, but they often are.
US energy consumption by source show alternative energy (AE) providing 6.8%. Could AE production expand to fill the growing consumption, leaving demand for carbon based energy flat and with recent exploration resulting in increased reserves and supply?
The US leads the world in wind power growth. “There remains substantial potential for the expansion of wind power to achieve approximately 20 percent of the nation’s generating mix.”
Solar takes a dip in 2007, but the future looks bright.
Commodity demand is guaranteed to increase. Energy demand is guaranteed to increase. However, energy is priced more on supply than demand. While Peak Oil may exist the overall energy supply is increasing and AE in conjunction with recent exploration should see energy supply continue to increase.
This doesn’t mean investments in Chesapeake Energy (CHK), Contango Oil & Gas (MCF) and other energy companies are bad. All assets are priced to clear and these are no different. Investments in those companies are likely to work out fine. All I wish to point out is they are far from risk free and they have considerable short term risk.
While investing based on a thesis, whether fundamental or predictive, is fine, it is usually better to wait for confirmation from the market. If you want to be long energy or commodities then why not wait until the market confirms your thesis. I recommend using a volatility breakout or channel breakout method, with tight stops. I know those words are anathema to value investors and many other market participants and that’s fine as everyone needs to find the right tools and path to follow. I am unwilling to restrict myself to one method.
In the short term prices for commodities and energy are trending down. This trend could continue for twelve months or more. Over that period energy and commodity companies will report lowered earnings and other poor news. Why bother guessing whether lower prices and poor news is reflected in current prices. Waiting and watching is difficult to do, that’s why patience is called a virtue. If compelled to buy then perhaps considering investing in thirds.
Hydrocarbons will continue to provide the majority of energy for the next decade. They currently provide 86% of the world’s need. However, change is afoot. The following TED talk by Juan Enriquez provides interesting insights into hydrocarbons. Commodities do not face the same technological and environmental risks and future commodity prices should be aligned with future demand.
Related Posts
Investing in cyclical companies – warning from July 2007 of investing in commodities
Resources
- http://www.energy.gov/
- energy return on investment
- Heat Content in one way to look at energy value. Coal
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