How to play this pullback in energy prices
The best time to look at buying in any market is when it’s on its lows. And one sector that is being beaten like a dog right now, is offering some great buying opportunities on the cheap. Energy.
Since January, oil prices have traded at or near $100. In fact, prices got so high in June that the Obama administration released 30 million barrels of oil from the Strategic Petroleum Reserve (SPR).
However, fast forward to today …
We have the aftermath of the debt debacle and the downgrade by S&P; and crude oil has pulled back dramatically. The fall in prices has been mainly due to concerns over an even deeper recession in the U.S. and Europe, and a possible bubble bursting in China.
Regardless of the reason, the drop in energy prices is likely a short-term gift, not to be squandered.
The term peak oil is used a lot, yet few people really understand what it means to us as investors and consumers.
Peak Oil: Facts and Fiction
The Hubbert Peak Theory is based on the idea that the amount of oil under the ground in any region is finite. Therefore the rate of discovery, which usually escalates quickly, must reach a maximum and then decline.
The theory is named after American geophysicist M. King Hubbert, who created a method of modeling the production curve. And he predicted that production of oil from conventional sources would peak by 2006.
|M. King Hubbert’s original 1956 prediction of world petroleum production rates.|
Many experts and critics of the Hubbert’s peak oil theory say that the oceans have vast supplies of oil that’s not even discovered yet. This is true …
The problem is that the easy to get to, easy to refine crude oil, is largely gone! The sour crude oil, and the extremely deep ocean crude oil fields, cost a fortune to research and develop, and even more to refine.
So peak oil doesn’t mean that supplies are going to dry up suddenly, it just means they’re going to be a lot more expensive to get.
Regardless of your opinion on peak oil theory, most of us can agree that oil is a finite commodity. Consequently supplies are dwindling and can’t be replaced.
Fossil fuels are responsible for running our cars, heating our homes, running our factories, shipping our food, and creating multitudes of chemicals, plastics and much, much more. Crude oil and its derivatives are largely responsible for the quality of life we enjoy in the world today.
Which means we have to find …
Energy for the 21st Century
With oil prices enjoying a big dip, consumers are breathing a much needed sigh of relief, but they shouldn’t get too comfortable, because prices are not likely to stay down here for long. Crude oil prices are bound to snap back higher soon. And when they do, alternative energy stocks will get a boost too. So don’t discount opportunities to buy traditional and alternative energy plays at these levels.
Many of the alternative energy stocks in companies involved with solar, wind technology, natural gas, and even rare earth “green energy,” are trading at bargain basement levels right now.
Also, look at major traditional oil companies that have pulled back significantly, equipment makers and drillers that will be key in exploring remote regions and deep-water locations for more supplies.
The truth is that this pullback in prices will not last. And the really bad news for consumers is, when it comes to energy, a lot of pain is on the horizon. However investors can essentially hedge themselves from the coming storm by investing in the incredible opportunities oil is affording us at these levels.
The critical factors that will rally oil prices again are numerous. The biggest factor though is increasing global demand in areas like China and India. Once that global consumer and manufacturing engine begins firing again, you can count on energy prices ramping up quickly.
So let me give you four action steps to take today to secure your investments in the energy sector right now, and position yourself for the next five years:
Step #1 — Oil
Look for major oil producers, drillers, refiners, and others whose stocks may have dropped on the current lower oil prices. These stocks will almost certainly rebound as oil prices climb.
Step #2 — Alternative energy
Look for viable alternatives that have a real future, including natural gas, solar, wind, and others. These stocks get hit hard when oil prices drop. So right now you can find plenty of great deals. Stick with the companies that are already producing a product.
Step #3 — Rare earths
Consider key rare earth metals stocks. Rare earths are largely responsible for many of the current and possibly future green technologies that will become so vital.
Step #4 — Nuclear is far from dead
The disaster in Japan underscores the risks of nuclear energy, but the fact remains that there are few power sources that are as cost effective as nuclear. Uranium stocks are one way to play it, and another is with rare earth element companies who produce thorium. Thorium may be the new nuclear fuel for the 21st century rather than uranium.
Individual energy stocks and key energy ETFs are a great way to profit from this pullback in energy prices.
But ETF options are what I like best because they offer you leverage on ETFs to play energy prices.
For example, you can use ProShares Ultra Oil & Gas ETF (DIG) for the oil sector,
Market Vectors Nuclear Energy ETF (NLR) for the nuclear sector,
Or even look to profit from green energy with the PowerShares Cleantech Portfolio (PZD).
And ETF options give you an added bonus: Limited risk.