In late February, energy stocks started to perk up as oil easily
moved past the $100 per barrel mark. Rising tensions with Iran were
seen as the big factor, but an improving U.S.economy also changed
the calculus for many investors. As U.S. consumers start to spend
more freely, they have been expected to burn more gasoline.
Emerging economies have already been consuming ever more energy,
and with little spare global oil production capacity, extra demand
from the United States threatened to push oil higher, as was the
case in late 2007 and early 2008.
why I decided
Marathon Oil (
$100,000 Real-Money Portfolio
. That move was aimed at providing exposure to the energy sector,
which showed signs of an imminent upward move.
Yet in the last six weeks, a curious trend has emerged. Whether
it's because we're driving more efficient cars, or $4 gasoline is
causing us to drive less, we're actually seeing a drop in gasoline
consumption. And this is setting the stage for an oil glut. In the
week beginning March 26,
that U.S. stockpiles of crude oil rose 7.1 million barrels last
week to 353.4 million barrels, a seven-month high.
Adding insult, many oil producers are also natural gas producers,
as the same energy field often produces both energy sources. So as
drillers were poking new holes in the ground toprofit from $100
oil, they have also been pulling up a lot of natural gas. As a
result, natural gas prices are falling even further (with natural
gas pricefutures dropping for the sixth straight session as I write
this), and may soon breach the $2 per thousand cubic feet (
Right now, gas producers should be rebuilding depleted reserves
after a typical winter drawdown. Instead, there is currently 58%
more gas in storage than usual for this time of the year, according
to the U.S. Department of Energy. At current prices, look for many
drillers tooffer downbeat guidance in the comingearnings season .
The fact that crude oil remains above $100 a barrel helps offset
some of the pain of plunging natural gas prices. But with crude oil
inventories rising,market watchers are increasingly expecting the
next move for oil to be down, perhaps to $90 or even $80. Talk of
$125 or $135 oil is quickly receding. It's perhaps ironic that
President Obama is getting pressure to release oil from the
Strategic Petroleum Reserve (
), even though no real shortage exists. Still, any such move could
quickly push oil sharply lower.
In light of all this, it no longer makes sense for me to have a
very largehedge in my
$100,000 Real-Money Portfolio
against rising fuel prices. I had bought more than $12,000 worth of
Marathon Oil on fears that rising oil would hurt my stakes in
and other economically-sensitive plays. At this point, reducing
by roughly half makes sense if I see impending problems for energy
I still want some exposure to this stock, however, not only because
I think it's the top industry play, but also because the energy
trade could easily be placed back on the front burner again at some
point. Perhaps tensions with Iran do boil over, which would lead
oil prices to spike much higher, very quickly. Perhaps the energy
sector gets hit by a bad hurricane season. Perhaps the
steadily-falling rig count finally brings supply down to a level
that boosts natural gas prices.
If that's the case, then Marathon Oil will finally break out to the
upside. As I outlined in February, the company's vast acreage is
still underappreciated by most investors. In a more neutral
environment in terms of energy supply and demand, Marathon would be
poised for significant
growth. Yet as I noted above, the bias appears titled to the
negative, not the positive right now.
Action to Take -->
I will be sell 150shares of Marathon Oil 48 hours after you read
this, leaving me with a 200-share position. If oil prices drop,
then this stock could end up back in the mid to high $20s, at which
point I'd be strongly inclined to boost the size of my position
right back up, as the long-term picture remains exceedingly
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-- David Sterman
David Sterman does not personally hold positions in any
securities mentioned in this article. StreetAuthority LLC owns
shares of F, AA, MRO in one or more if its "real money"
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