Energy funds rally sharply

But oil bump could be short-lived

Jan 12, 2018 @ 5:00 pm

By John Waggoner

As the Standard & Poor's 500 soars higher, there's another bull market bubbling up: Crude oil. Black gold. Texas tea.

But before you sell the shack and move to Beverly Hills, keep in mind there's a whole lot of oil still in the ground and offshore, and the recent rally could be overdone.

The Standard & Poor's 500 stock index has gained 3.58% this year, including reinvested dividends, but energy funds have jumped 6.48%, according to Morningstar Inc. Those returns beat not only the blue-chip stock index but red-hot technology funds as well, which have jumped 5.07% this year.

So far this year, the stocks have beaten the commodity. West Texas intermediate crude rose to $61.73 a barrel Wednesday, up from $60.46 a barrel at the end of 2017. Nevertheless, crude has been on a roll: Prices bottomed at $26.19 in February 2016.

What's behind the rally in oil prices?

Weakness in the value of the U.S. dollar is one culprit, said Stewart Glickman, energy analyst for CFRA. Oil and the dollar tend to move inversely.

Another has been an increase in geopolitical instability. Iran, which has been wracked with internal turmoil the past few weeks, produces about 4 billion barrel of oil a day. Venezuela, a failed state, produces about 2 billion barrels a day, Mr. Glickman said.

"The past few years, the premium on oil prices for global instability went to zero, but it's making a recovery," he said.

The big worry about oil prices: The U.S. has been the largest non-OPEC oil producer for years, and shows no signs of letting up. When Saudi Arabia flooded the world with supply to squash U.S. fracking, U.S. oil producers responded by becoming more efficient.

"I think people are overlooking how much the U.S. can boost production," Mr. Glickman said.

Even at these levels, the recent move by the Trump administration to open up offshore drilling probably won't have a big effect on supply.

"It takes a lot of time to drill offshore, but you can start drilling in the Permian Basin in a week," Mr. Glickman said. Shallow-water drilling needs about $50- to $55-a-barrel prices to be worthwhile, while deepwater drilling needs about $75 a barrel.

Even if energy prices fall, midstream energy companies — pipelines — look to be in good shape. Before the collapse of oil prices, boosters of energy master limited partnerships noted that pipeline profits depend on the volume of oil pumped not the price of that oil. Unfortunately, in the event of a price collapse, producers simply decide to pump less oil.

Funds that invest in oil MLPs have gained an average 5.66% this year, according to Morningstar, and many still support high yields. Alerian MLP ETF (AMLP), for example, has a 7% 12-month yield.

"I don't have any real concerns about midstream energy companies," Mr. Glickman said. "They are now living within their means."

0
Comments

What do you think?

View comments

Recommended for you

Featured video

Events

The power of commodities in 2019

Historically commodities have outperformed stocks at the end of expansions and in early recessions. So why haven't commodities rebounded? John Love of USCF explains.

Latest news & opinion

10 top scams targeting seniors

Phone calls to a Senate committee hotline show trends in frauds perpetrated against seniors.

Robert Moore, Cetera CEO, stepping down for health reasons

Chairman Ben Brigeman will serve as interim chief executive while a search for a permanent CEO is conducted.

The AMT is no longer a problem for many clients

With income thresholds higher and a lower SALT deduction after tax reform, the AMT will realistically only apply to wealthy Americans with out-of-the-ordinary tax events.

Cetera, other broker-dealers refuse to sign Ohio National contracts

Advisers wonder what the lack of a formal brokerage agreement means from a regulatory standpoint.

10 millennials making their mark in Washington — and beyond

These next-generation leaders are raising their voices and gaining influence over financial advice regulation and legislation.

X

Hi! Glad you're here and we hope you like all the great work we do here at InvestmentNews. But what we do is expensive and is funded in part by our sponsors. So won't you show our sponsors a little love by whitelisting investmentnews.com? It'll help us continue to serve you.

Yes, show me how to whitelist investmentnews.com

Ad blocker detected. Please whitelist us or give premium a try.

X

Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print