Saturday, April 4, 2009

The Energy Trade

I am trying to see what I can learn from the recent movement in the energy stocks. Does it point to inflation? I would submit that it does. Many will argue that the move in the energy commodities is only technical and there is no increasing demand for oil and gasoline. How many of you out there have canceled vacation plans this summer? While some have, many have not and I believe that we will see surprising demand this summer.

Stocks like RIG,DO,NOV, and XTO did very well yesterday. Many argue that we can't see demand pick up until after our economy starts to turn around. Is that true? Or can demand from China and India cause demand to rise while we are still in an economic downturn. I wrote about pockets of strength earlier in the week and believe that it is that concept that will shock some with the demand this summer.

I was and have been very wrong about Natural Gas. I just can't see natural gas staying at these low levels for very long. Lets face it, companies are still pulling gas out of the ground for 2 reasons---one they have to have continued cash flow and they are anticipating a turnaround in prices. Do you believe that they are rushing to put new production online right now? I think not. The cost of developing new sources outweighs the risk with prices at these levels. When demand does pick up---it will take some time for the production of new fields to come to pass. We could see rapid upside once demand picks up. It is not a matter of IF it is a matter of WHEN this happens.

Companies such as XTO are well run and have suffered at the hands of falling commodities prices. These are the companies that are poised to do well as inflation takes hold. This is not to say that they can't go lower in the short run---but the upside potential is appetizing to me!!

Many are arguing that the banks are going to contract credit and while I don't argue the point--I argue the impact. I recently had a card cut off simply because I had not used it in a couple of years. Did banks contract credit? Yes Was that credit really "in play"? Not at all. Actual economic impact of that company "bringing in" $8500 of available credit? ABSOLUTELY ZERO.
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