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It's a strange day when you have
Libya to thank for lowering crude oil prices. But that's just what we might
be seeing.
Maybe... Well, for just that one
day, anyway.
Confused? We are, too. So I got
in touch with Zachary Scheidt, editor of Velocity
Trader, for his take on Libya and the energy markets as a whole.
But let's get a little
background first.
On Feb. 15, human rights
activist Fethi Tarbel was
arrested. This sparked a riot in the northeastern
city of Benghazi.
Before the uprising, Libya
pumped 1.6 million barrels of crude oil a day in February. By May, only
60,000 barrels of oil were produced a day.
Now rebels have finally taken
hold of oil infrastructure around Tripoli, and the Gadhafi regime looks ready
to fall. But crude oil production isn't coming back on line yet. In fact,
Johannes Benigni, managing director of JBC Energy,
said that it could be 1 1/2 years before Libyan oil is pumping at full
strength.
He said that the country could
pump 400,000 a day by the end of the year. That's only a quarter of the
amount of crude oil Libya produced before the uprising.
How Does
This Affect Crude Oil Prices?
So let's take a look at how
events have affected crude oil prices.
This is a chart showing spot
prices for both West Texas crude and Brent crude.
As you can see, oil prices were
well on the rise before the riots in Benghazi. And oil prices started falling
before Libyan rebels made their play for Tripoli.
So what's really driving crude
oil prices?
Zach says, "Oil prices have
been trending lower more due to the economic relapse than anything else. But
that could change quickly if the perception is that the unrest in Libya is
going to spread through the Middle East like it did earlier in the
year."
In the meantime, though, oil
prices have been seesawing, sometimes moving $5 or more in a single day. That
makes it hard to play oil, even for traders, unless they are glued to their
computer screens.
Zach acknowledges that
short-term trading has been weak. But the long-term potential of oil is still
there, and the recent price drops are setting up some great opportunities.
"If supply disruptions
happen, then we will immediately begin to see opportunity in the energy area
again," he says.
By the energy area, Zach means
oil, natural gas and even solar. Many solar energy companies are trading with
P/E ratios in the single digits, but their pipeline of projects will lock in
growth for the next several years, Zach says.
This could mean they are
severely undervalued right now, and ripe for a rebound.
And what about natural gas? We
haven't been hearing a lot about this type of energy.
Take a look at prices over the
past nine months.
Natural gas has totally missed
out on the rise in oil prices, yet has dipped just as much in the past four
months.
What does this mean for the
investment world? Is there pent-up demand for natural gas, or are we just completely
oversupplied?
Natural gas is a cyclical
commodity. Prices and demand move with the seasons. Hot and cold months are
when demand -- and prices -- climb. Spring and fall
are when prices tend to fall.
Over the past five weeks,
natural gas storage has seen net withdrawals. Warm weather hasn't allowed for
a build-up of natural gas. But as temperatures have cooled, so have natural
gas prices.
Here's the thing, though.
Natural gas consumption for
electrical power has topped industrial consumption since late 2007. That
means power plants are generating more power from natural gas than ever
before.
Take a look at this chart from
the Energy Information Administration.
 
This is a big shift, and Zach
says there might be some opportunities in this area.
"Many natural gas pipeline
companies are planning new projects that will lead to revenue increases in
the next few quarters," he says. "These companies are also
interesting because they pay a nice dividend yield (very attractive in a
zero-interest-rate environment) so this is another area of opportunity for rebound
trades."
The Fed has said it would hold
rates this low for the next two years, which gives investors plenty of time
to profit off of these next few quarters.
Zach was busy with research for
his next Velocity Trader alert, so I couldn't wrestle a few names
from him. But here are a few natural gas pipeline companies with dividends
and decent valuations for you to look through.
Atlas Pipeline Partners LP (APL:NYSE)
Enbridge
Inc. (ENB:NYSE)
Magellan
Midstream Partners LP (MMP:NYSE)
Spectra
Energy Corp. (SE:NYSE)
Western
Gas Partners LP (WES:NYSE)
This is by no means an
exhaustive list, and some are a better value than others right now, so make
sure you take a hard look at the numbers.
Sara Nunnally
Taipan Publishing Group
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originally published here
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