Financial Professionals


It’s not about spot oil


At the end of 2010, I presented several market commentaries identifying potential 2011 opportunities. Consistent throughout was my expectation that exposure to energy, most specifically oil, would be rewarded with outperformance in 2011. Mistakenly however, some readers assumed that to mean gaining exposure via tools that track the spot price of oil.  If you re-read those commentaries, you will find I have no 2011 "price target" for oil prices.  In fact, in over 20 years following oil, I would say very few, if any, ever nail the spot price forecast. So let's be clear - tracking oil prices is not what investors should do in terms of their energy allocation.  I discourage a focus on the direction of any oil futures.

Rather, my favorable expectations for energy investments in 2011 are motivated by my thesis that global demand for energy will continue to recover and thus provide energy corporations with "pricing power."  In 2010, emerging market demand for oil and its byproducts was resilient. I expect recovering demand from the developed economies in 2011.

As yields push higher and global inflationary fears build, pricing power is paramount.  What corporations can continue to pass along costs and retain premium prices?  The answer to that is that corporations that are "providers" of what is globally demanded.  In this thesis, energy.

The civilian unrest in North Africa makes me even less confident that Nymex WTI Oil Futures are an accurate reflection of true energy demand.  Keep in mind that when potential supply disruptions in the Middle East present themselves, they most directly affect the price for ICE London Brent Crude oil.  Logically, the closer geographic delivery point makes Brent Crude oil more desirable. 

February 11 Spot Closing Price and Year-to-Date Performance:
Nymex WTI Oil $85.58, year to date (6.347%)
ICE London Brent Crude Oil $100.94, year to date + 6.533%

U.S. economic data continues to suggest that the global economic recovery has landed on our shores and is heating up. Consumers are spending more to fill gas tanks and heat homes. Power generation is returning to pre-recession levels. The investment is to gain exposure to those "providers" of energy and natural resources.  As an example, look at the year-to-date performance (as of 2/11/11) for the following:  

XLE (ETF which includes Integrated, Drilling and Energy Services) +8.586%
OIH (ETF which includes Global Oil Service companies) +10.192%
SU (Canada based Suncor Energy) +6.607%
FTO (U.S. mid-continent Oil refiner) +36.757%

Past performance is not a guarantee of future results.

Virtus Investment Partners provides this communication as a matter of general information. The opinions stated herein are those of the author and not necessarily the opinions of Virtus, its affiliates or its subadvisers. Portfolio managers at Virtus make investment decisions in accordance with specific client guidelines and restrictions. As a result, client accounts may differ in strategy and composition from the information presented herein. Any facts and statistics quoted are from sources believed to be reliable, but they may be incomplete or condensed and we do not guarantee their accuracy. This communication is not an offer or solicitation to purchase or sell any security, and it is not a research report. Individuals should consult with a qualified financial professional before making any investment decisions.