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Energy Back to Market Weight

02/01/2012
During the 2011 calendar year I suggested two weighting adjustments in the energy sector. On May 4, 2011, I moved energy from “overweight” back to “market weight” and on September 14, 2011, I moved it back to “overweight” once again.
 
Currently, I expect it is time to move energy back to market weight once again. I am rather confident that the next move in 2012 will be to raise it back to overweight. Understand this is NOT a “call” on the direction of the overall market or global economy. Rather, it is based on the following:
 
•   The political football, otherwise known as the Keystone pipeline delay, will place WTI crude oil in a position to once again build inventories at Cushing, Oklahoma. The evidence over the past few weeks supports that discouraging result.
 
•   Libyan oil production increased 225,000 barrels per day last month to 925,000 barrels a day. This suggests Libyan oil is coming back online quicker than previously anticipated. In August 2011, production was a mere 45,000 barrels per day.
 
•   OPEC production now stands at 30.9 million barrels per day, its highest level since November 2008. Apparently OPEC is back at the game it perfected, “cheating” on its designated quota.
 
•   An abnormally warm winter has placed less stress on heating oil and diesel supplies.
 
•   U.S. gasoline demand is now at its lowest level since September 2001.
 
Any capital raised by lowering holdings of energy should not be left in cash or Treasuries. The FOMC’s pledge to keep interest rates low for even longer highlights that corporate bonds are operating in the “sweet spot” of their investment cycle. As global equity markets remain supported and global rates stay low, exposure to small caps should be considered as a port for capital raised on the energy downgrade.
 
Oil, July 2011 through January 2012

Source: Bloomberg
 

Oil, January through June 2011

Source: Bloomberg

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