Like every investor, I try to read voraciously to get an edge.
I'm always on the lookout for investment angles that haven't gotten
much press but could eventually turn into a market-moving event. So
my ears perked up last week when I saw thathedge fund traders have
recently been aggressively buying energy
, betting that we'll soon see oil move up to $100 a barrel. In
subsequent days, it's become easier to see the signs of $100 oil
popping up on people's radars.
For example, on Monday, Saudi oil minister Ali Naimi suggested that
oil prices could move up to $90 without hurting global economic
growth, up from a previous perceived ceiling of $80. That's led
some to speculate that OPEC will try to maintain production at
current levels even as signs are emerging that oil demand has begun
to pick up.
Economic growth in emerging markets like Brazil and China remains
robust, which led to a 1.4 million barrel jump in the third
quarter, according to the International Energy Agency (IEA) and a
in Western Europe and the United States. Any further uptick in
global demand could push oil demand back up to -- or above --
Analysts at Merrill Lynch see $100 oil by early 2011 for a more
prosaic reason: They believe that the U.S. Federal Reserve's plan
for quantitative easing (QE2) will weaken the dollar and raise the
price of commodities, particularly gold, silver and oil. [Read: "
HowThe Fed Will Affect Your Portfolio This Week
"] The recent move in the dollar is a possible harbinger of things
to come, according to Merrill: "We believe that oil is only
starting to reflect a weak U.S. dollar against G10, leaving room
for oil price rises as emerging market currencies strengthen
against the U.S. dollar."
Make no mistake, $100 oil is not nearly as lethal to the
as $140 oil was a few years ago, but it still creates serious
headwinds and tailwinds in a range of industries. Here a just a few
- Airliners see a sharp drop in profits next year as rising jet
fuel costs cannot be offset by commensurately higher fares.
Carriers have already pushed through steady price increases in
the past 18 months, but are pushing the limits of demand
elasticity. Notably, while many carriers were nicely hedged
against rising fuel prices a few years ago, they have largely
bypassed hedging activities in this cycle. If they are to act,
they should do so soon.
- Sales of high-margin SUVs and pickup trucks would likely
stall out once again after recent signs of a demand uptick that
underpins rising profit forecasts for
Ford Motor (
and other auto makers in 2011. [
to read my colleague James Brumley's take on which
auto stocks are the best investments
- Consumers would likely feel a pinch at the gas pumps and also
at the grocery store, where rising transportation costs would
lead to a rebound in food priceinflation .
- Road-based freight transporters such as
Arkansas Best (Nasdaq: ABFS)
YRC Worldwide (Nasdaq: YRCWD)
have only recently achieved major cost cuts that help to narrow
the cost gap between themselves and the rail-based freight
carriers. All of a sudden, $100 oil swings the pendulum clearly
back in favor of rail haulers like
Union Pacific (
Norfolk Southern (
. [See StreetAuthority contributor Tim Begany's
three favorite rail stocks
set to outperform]
- The United States is also a potential loser. Despite heated
rhetoric from both parties, we still have yet to meaningfully
wean ourselves off of imported oil. And $100 oil simply expands
our tradedeficit .
A green rebound?
Of course, higher oil prices are just what the clean energy
industry could wish for. Solar and wind providers have been highly
dependent on erratic government policies to support demand and have
thus far come away with nothing in terms of a carbon tax that makes
their technology comparatively more cost-effective. Yet some
projects that were not feasible at $75 oil without subsidies
suddenly become more feasible in the face of $100 oil. The
WilderHill Clean EnergyETF (
, which surged above $25 briefly in early 2008, now trades below
$10, reflecting the recent period of relatively cheap fossil fuels.
If oil moves back into triple-digit territory in 2011, the timing
would prove perfect for Brazil, which is in the process of
developing massive new oil fields through its quasi-national
oil company. Shares of Petrobras came under pressure this summer
after it needed to sell massive new blocks of stock to fund
development. As a result, shares are -35% off of their 52-week
Lastly, a wide range of natural gas companies stand to benefit from
surging oil. For starters, it would increase demand as any power
plants that can switch between oil and gas make the move to gas.
Second, it increases the likelihood that auto makers roll out more
natural gas-fueled cars.
is an early leader in this area, Daimler Benz is reportedly set to
follow suit, and other auto makers may do so as well. If enough do
so, then natural gas prices will finally start to rebound as demand
Clean Energy Fuels (Nasdaq: CLNE)
, which operates natural gas fueling stations, and
Westport Innovations (Nasdaq: WPRT)
, which retrofits big truck engines to run on natural gas, would
also be clear beneficiaries.
Action to Take -->
Energy has been off of investors' radars in 2010, but that may not
be the case in 2011. It pays to keep an eye on developments in the
energy markets: The U.S. economy can tolerate $100 oil -- $120 oil
is another story. If oil prices start creeping up, you should think
about rotating out of stocks in the losing areas I mentioned above
and into some of the ideas I mentioned earlier.
-- David Sterman
David Sterman started his career in equity research at Smith
Barney, culminating in a position as Senior Analyst covering
European banks. David has also served as Director of Research at
Individual Investor and a Managing Editor at TheStreet.com. Read
Disclosure: Neither David Sterman nor StreetAuthority, LLC hold
positions in any securities mentioned in this article.
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