Having spent the better part of my adult life monitoring and trading the price of Oil, I owe it to "Black Gold" to provide its own individual 2010 Outlook. I will cover the rest of the Commodity space for 2010 in the waning days of '09 and yes, I will address the game changing XOM / XTO deal and its impact on the Natural Gas industry.
It is easy to make mistakes when investing in Energy-related assets. Too often the investor focuses on the spot price of Oil which keeps emotion in the investment plan. For instance, as we approach the end of 2009, Oil prices have declined, actually trading below $70 in the spot contract on December 15. Investors may grow concerned about its recent performance. Let's address what just might be happening right now because "opportunity" will present itself over the next 30 to 45 days.
Currently the "spot spread," the price of the first Oil month minus the second Oil month is trading @ $2 Contango. That means the second month is more expensive. That is a bearish signal, with global supplies of Oil readily available in the near term. In addition, index allocations / weightings for 2010 will seek further diversity which translates into less ownership of Oil futures contracts and more ownership of other commodities. So, the next 30 to 45 days may just challenge the emotional strength of energy investors. However, as I said, "the opportunity" should be the focus.
Let's look back at the past decade for an understanding of the potential opportunity.
THE YEARLY LOW FOR OIL 2000-2009
2009 January 20 @ $32.70
2008 December 19 @ $32.40
2007 January 18 @ $49.90
2006 November 17 @ $54.86
2005 January 03 @ $41.25
2004 February 05 @ $32.20
2003 April 29 @ $25.04
2002 January 17 @ $17.85
2001 November 19 @ $16.70
2000 April 10 @ $23.70
1st QUARTER SEASONAL WEAKNESS! That could be the opportunity.
This strategy has worked successfully 4 out of the past 6 years. The two outliers during those 6 years have "historic explanations."
In 2008, on January 22, a low was established @ $86.11. That remained the low until October 8 - the moment the Great Recession imploded the capital markets.
In 2006, on February 16, a low was established @ 57.55. That remained the low until October 11 - when Katrina "lost production" returned after one year.
What about the early decade years of 2000, 2001 & 2003?
First of all, I am ready to toss them out just on the absence of viable investment tools for investors. ETF exposure really didn't get cranked up until 2004. But let's look even deeper at those years.
In 2000 and 2003, the low for the year occurred one month into the second quarter. Again "historic explanations" provide insight toward the delay. In 2003, it was the March "Shock and Awe" in Iraq. In 2000, it was the March "NASDAQ Bubble Burst."
2001 proves that "investing is just not that easy," as any reasonable explanation can't justify the straight down year for Oil prices with the high for the year actual set on January 22 @ $32.70.
FUNDAMENTALS FOR 2010 SUPPORT GOING WITH THE 1ST QUARTER WEAKNESS OPPORTUNITY
The first question to ask yourself is "How does the world grow its future supply of Oil?" Answer that correctly and you get a pass to not have exposure to Energy. However, my viewpoint is that there is no correct answer to that question and thus, during the 1st quarter of 2010, seasonal weakness in Oil presents an opportunity to establish an overweight position.
The OPEC story is well known; however, much needed production increases are necessary from non-OPEC producers to meet rising emerging world demand. In 2010, I expect the balance to tip toward demand over supply again when analyzing non-OPEC production versus emerging world demand. Chinese and Indian imports reached historical highs this Fall. Middle Eastern demand is strong again as well.
For the spot price of Oil, the 200 day moving average currently rests @ $65.58. I would be surprised by any significant drop below that price level in 2010. Should any "Armageddon" scenarios unfold, $55 is a MAJOR line in the sand. On the upside, as the year progresses, I would expect tightening fundamentals to elevate Oil prices toward the Lehman Crisis breakdown levels between $89 and $94.
The strategy is to use any first quarter seasonal weakness in the spot price of Oil to overweight Energy via equity names with strong balance sheets and larger global footprints which are well positioned for earnings expansion