[Editor's note: In honor of the New Year, we at
StreetAuthority thought it might be worth looking back at some of
our most popular articles of 2012. This article was originally
published on Nov. 15.]
With the drama of the presidential election behind us, it's time
for investors to focus on the real task at hand: Howinvestments
will pan out next year, particularly in the energy sector. After
all, energy has a role in just about every good produced and
service rendered in this country.
Being thecontrarian investor that I am, I think 2013 could mark
the end of triple-digit prices for oil. The good news is energy
investors don't have to panic. There are plenty of opportunities
toprofit from cheap oil.
Black gold's last "hurrah..."
From its 2008 peak near $133 per barrel, oil has settled back to
around $90 per barrel -- a nearly 34% drop. But the best way to
track oil prices is by following the performance of the
United States OilFund ETF (
, which tracks the minute-by-minute fluctuations of West Texas
Take a look at the chart below...
Since the steady climb in 2008, USO has been in a clear
downtrend. Yes, oil has rallied somewhat here and there this year
thanks to geopolitical tension in the Middle East and the Federal
Reserve's quantitative easing (inflation supportscommodity
prices,deflation softens them, andthe Fed has definitely had an
inflationary posture). But the fact is that oil is headed down
below $90 per barrel and possibly lower in 2013 and the next
Increased domestic production --
I may sound like Captain Obvious as I talk about the huge wealth of
fossil fuel resources currently being tapped in the Bakken and
Eagle Ford deposits. But the underlying numbers the nation has to
look forward to are downright epic. The United States will likely
be producing nearly 11 million barrels of oil per day domestically
by 2015, according to the National Association of Business
Economists. By 2020, that number could jump to 14 million barrels
per day. This brings the country pretty close to energy
independence. In fact, U.S. Department of Energy data shows that
for the first time since 1949, the United States exported more
petroleum products than it imported in 2011.
6 Ways to Profit from the "New Saudi Arabia of
The days of U.S. dependence on foreign oil are dwindling and the
country will enjoy this bonus in the form of lower energy prices, a
stronger domesticeconomy , as well as a tamer geo-political
climate. Oil exploration and production will likely continue to
grow in the country as the federal government crafts new and
definitive energy policies in the next few years.
1. Tensions easing in Iran --
The United States is not dependent on crude oil from Iran, but it
does pose a real threat to the security of the global flow of oil.
Its close proximity to the Strait of Hormuz -- the only open
passage from the Persian Gulf to the open ocean -- along with its
belligerent relationship with Israel and its advanced pursuit of
nuclear weaponry keep globalfinancial markets on tender hooks. But
expect to see some form of resolution in tensions with Iran. Even
if an airstrike is carried out, expect oil prices to spike only
2. Softer global demand --
While the U.S. economy seems to be muddling toward improvement, the
fiscal and economic problems in Europe continue to cloud the global
economic outlook with uncertainty. Germany is showing visible signs
of slowing and France is heading into a recession . And the
troubles in Spain, Greece and Italy have been well-documented at
this point. In light of all this, the Paris-based International
Energy Agency projects crude oil demand in Europe to contract 2.5%
To the East, some pundits argue that the Chinese economy may be
getting tired. If this is the case, then look for global oil demand
to weaken steadily. In addition, China also needs alot of petroleum
byproducts for manufacturing, primarily for the injection-molded
plastic required for many manufactured goods. But as more
manufacturing returns to the United States, companies like
General Electric (
are moving manufacturing operations from China back to the United
States, and the demand for Chinese cheap goods will likely shrink
as will China's need for the raw materials to manufacture them.
Going into 2013, look for these three factors to influence the
price of oil on the down side. Currently, West Texas Intermediate
crude trades at around $86 per barrel. While we may see prices
fluctuate as high as the mid-$90s, the higher domestic supply and
global weak demand for oil will probably keep prices within a
trading range in the upper $80s to the mid-$70s per barrel.
So how can investors take advantage of this opportunity?
One way is through energy master limited partnerships (MLPs).
Energy MLPs are typically in the transportation business, so demand
for their services are determined by energyvolume , not prices. In
other words, these pipeline companies get paid to pump and
transport oil and gas whether oil is at $150 or $15.
The irony is that MLP unit prices typically move in tandem with
oil prices, but MLPs can still turn out to be profitable
investments. This is because they are also one of the best-yielding
investments out there, so as their unit prices go downward along
with oil prices, theiryield goes up. And that's when it's usually
time to buy.
One of my favorite MLPs currently is
Buckeye Partners LP (
. With a generous 9% yield, it's currently trading at a compelling
31% discount to its52-week high of about $45 per unit. Buckeye is
one of the largest domestic movers of crude and refined oil in the
Risks to Consider:
While the empirical evidence for this forecast is quite
substantial, keep in mind that when it comes toinvesting --
especially in energy -- the only thing certain is
Action to Take -->
Rather than capitalizing on the movement of oil prices -- which can
turn out to be quite volatile and stressful -- focus on
high-quality companies that are well equipped to makemoney
regardless of the price of oil. Buckeye Partners is a great example
of this -- it offers a superiorbusiness model with an attractive
and reliable income stream.