Sector that's been hosed for five years finally sees light of day

Syria tensions, restrained oil production sends energy funds gushing

Apr 12, 2018 @ 2:44 pm

By John Waggoner

A surge in oil prices has provided some fuel for long-suffering energy investors.

The price of West Texas Intermediate crude oil hit $66.14 a barrel at midday Thursday, closing in on this year's record $66.27 from Jan. 26. Crude hit a low of $26.19 in February 2016.

For investors, low oil prices have meant that energy funds have been pumping mud: The average equity energy fund has lost 5.43% a year over the past five years, a period in which the Standard & Poor's 500 stock index averaged a 12.97% annual gain.

But there are signs that the long dry spell in energy could be ending. Oil inventories have been falling sharply the past few months — a period when they typically rise, said Kevin Holt, chief investment officer at Invesco. That should continue as the summer driving period approaches, a time of year when the industry normally sees sustained inventory drawdowns. High inventories have continually plagued the industry, keeping prices low.

One reason for the drawdowns: Energy companies have realized that overproduction works against them.

"We're starting to hear messages from CEOs that they will be managing for profitability rather than growth at any cost," Mr. Holt said. It's not just U.S. oil companies: Saudi officials are targeting $80 crude prices, according to The Houston Chronicle. While that is probably optimistic — the Energy Information Administration forecasts WTI crude at an average $59.37 next year — the outlook for oil prices is considerably better than it has been in the past five years.

Another factor in higher oil prices: Growing unease in the Middle East as the U.S. mulls a strike against Syria. Prices for Brent crude have surged to nearly $67 a barrel, the highest since 2014.

"Recent rhetoric from the Trump administration inflaming the situation in Syria and pushing a trade war with China is like pouring gasoline on a fire — they certainly put more upward pressure on prices," Patrick DeHaan, head of petroleum analysis at GasBuddy, wrote in his most recent analysis of energy prices.

Restrained production and growing demand have translated into higher prices for refined products such as gasoline. The average national price for regular unleaded gasoline is $2.68 a gallon, the highest since July 2015, according to GasBuddy.

Higher prices for crude have translated into higher prices in the energy sector. In the past four weeks, as the S&P 500 fell 5.04% and technology mutual funds slid an average 6.3%, energy funds have jumped 3.4%. The top-performing fund, Guinness Atkinson Global Energy (GAGEX), has jumped 6.6% in the past four weeks.

"I think oil stocks are pretty inexpensive," Mr. Holt said. "Investors are discounting $50 oil, and these companies will have so much leverage in profits at $60 to $65 a barrel."

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