Wednesday, February 23, 2005

Energy prices positioned to Spike!

The Spread as of 2/23/05
What is it with interest rates rising and with no effect on long-term rates? Decidedly, inflation is moderate and real-rates are lower. Apparently investors figure that something is better than nothing. (The Fed expects inflation to run 1.5% to 1.75% through 2006. The Federal-Funds target rate now stands at 2.5% and 30 year T-Bonds are around 4.6%).


What else is poised to go up? What effect will it have on the market?

You do the math
Oil and gas-producer prices and coal? Oil is a limited-supply commodity that will experience high pressure demand and less in the way of supply. The good old USA is using more oil; China is using more oil and growing. Even Europe wants more of the greasy stuff. It’s an understatement to say that the Middle-East is in trouble and OPEC appears to be producing at or near capacity. Will energy prices rise through 2006? Go ahead, you do the math.

Baby it’s cold outside, the details
OPEC may not be able to patch the breach if supply interruptions stop-up in the pipeline. There is grumbling that $60 a barrel this year isn’t a question any longer. Excess capacity is the lowest in 30 years. Global oil demand grew 3.4% in 2004. The Saudi’s pump a cushion of 1.4 million to 1.9 million barrels a day in case of emergency.

Not to besmirch the name, but crude now stands at around $51.00 a barrel. And lo and behold, Oil-Futures are up 49% compared to a year ago. Do those rascally Futures-Traders know something we should know?

There seems to be a little more going on than a spike caused by our current cold snap in the US and in Europe. The good news is that looking at some funds will warm the cockles of your heart.

What the Funds are Saying
VGELX: Vanguard Energy Fund

Returns
3-month, 12.66% Year to Date, 11.81% 1-Year, 47.31% 3-Year, 27.67%

FSENX: Fidelity Select Energy Portfolio
Returns
3-month, 14.32% Year to Date, 13.99% 1-Year, 45.36% 3-Year, 18.14%