Energy Volatility, Mega-Deals, the Fed… and More
For this week’s Big Interview, I sat down with Robert Rapier, the in-house energy expert at Investing Daily and the chief investment strategist of Utility Forecaster.
Robert Rapier is one of the world’s foremost experts on the oil and gas industry. The guy in the picture, in the freezing snow? That’s Robert. He’s inspecting an oil field in the Permian Basin in Texas.
Robert has two decades of in-the-trenches experience in a wide range of fossil fuel and biofuel technologies. He earned his master of science in chemical engineering and a bachelor of science in chemistry and mathematics (double major) at Texas A&M University.
In his quest to generate market-beating gains for his followers, Robert gets out into the field as often as he can to observe market dynamics with his own eyes.
With volatility roiling the energy market and utility stocks on a tear, I felt that now is a good time to tap Robert’s expertise.
Oil and gas prices have been bouncing around lately, as inventory and demand data fluctuate and provide a mixed picture. Under current conditions, what are your latest projections for energy prices?
I believe the natural gas markets will continue to be adequately supplied. In some places, there is more natural gas than the markets can accommodate.
For example, in the Permian Basin natural gas prices have routinely turned negative in recent months. That situation will remain until more natural gas pipeline capacity is built out. Thus, I see natural gas remaining below $3/MMBtu, despite inventories that are a little tight coming out of the winter.
The oil markets are looking a lot tighter, which was my expectation (and prediction) for this year. Brent crude is now over $70 per barrel and West Texas Intermediate is approaching the mid-$60s. Those prices represent gains of nearly 40% since the start of the year. What’s driving the rise in WTI and Brent?
Last month Goldman Sachs (NYSE: GS) reported that oil demand was on pace to jump by nearly 2 million barrels per day in the first quarter, well ahead of bearish forecasts. I have been saying for years that those who believe we are on the cusp of peak oil demand are getting ahead of themselves.
On the supply side, U.S. production continues to grow, led by strong gains in the Permian. But OPEC has responded by lowering output to prop up prices. In addition, unrest in Venezuela and Libya are contributing to lower oil exports.
Add it all up and I think my prediction at the beginning of the year, that WTI would get back to $70/bbl this year, remains in place. Supply and demand are the tightest they have been in more than a year, and we are starting to see a return of predictions of $100/bbl oil.
I don’t think we get there anytime soon, but I do think OPEC will maintain discipline and keep restraining production as U.S. production continues to grow. That will keep upward pressure on oil prices.
Why should investors who aren’t exposed to the energy patch care about oil and gas prices? How do the fortunes of the energy industry affect the broader economy and stock market?
The energy industry has a tremendous impact on other sectors. The utility industry has benefited from low natural gas prices, while rising oil prices hurt the airline and trucking businesses.
At the same time, what we pay for energy helps dictate what we have left over to pay for other items. Extremely high oil prices will dry up disposable income for many people, leading to less overall spending in the economy.
This dynamic may change somewhat if the U.S. becomes a net exporter of crude oil, as high oil prices will result in an increase in the amount of money flowing into the U.S. But as long as we are a net importer, high oil prices increase the amount of money we are sending to Saudi Arabia and Russia, among others.
Last week, energy “supermajor” Chevron (NYSE: CVX) announced it would buy Anadarko Petroleum (NYSE: APC) in the sixth-largest oil and gas deal in history. What’s it all mean for investors?
It was a nearly 40% windfall for Anadarko investors, while Chevron investors weren’t happy with the price. Chevron shares dropped nearly 5% on the news. However, Chevron management has proven their competence over the years. I agree that on the surface it looks like a high premium, but there are synergies there that increased the appeal for Chevron.
Outside of this deal, it may mean that more consolidation is coming in the Permian Basin. This area has some of the most attractive shale oil economics anywhere, and the supermajors like Chevron and ExxonMobil (NYSE: XOM) are increasingly moving in.
Several Permian Basin companies saw their share price gain double-digits following news of the Chevron deal, a strong indicator that investors believe other candidates could be acquired.
Specifically, Pioneer Natural Resources (NYSE: PXD) and the much smaller Parsley Energy (NYSE: PE) were both up more than 10% following the Chevron-Anadarko deal.
As the lead analyst at Utility Forecaster, you specialize in income investments. Investors have been fleeing to safe havens, such as utilities. Will the sector’s outperformance continue in 2019 and why?
Volatility has returned to the stock market, which reminds investors that they can lose money quickly. So that has helped drive investors into these safe havens.
The economy is also late in the business cycle, when economic growth rates start to slow as credit tightens. The consistent overperformers during the late-cycle are defensive and inflation-resistant sectors like the energy and utilities sectors.
Recession also often follows the late cycle, and utilities generally outperform during a recession. There is no evidence that we are on the cusp of recession, but some recession indicators have started to pop up.
Utility stocks are interest rate sensitive, so by necessity, you closely monitor rates. Won’t rising rates hurt utility stocks?
Certainly, as interest rates rise, we will see competition from fixed income offerings. Thus, we have to pick companies that offer a compelling combination of yield and yield growth, while managing the downside risk.
It has become harder to find value in the conventional utility space as money has flowed into the sector, but there are still some bargains out there.
Governments around the world, including our own, have been pressuring their respective central banks to loosen monetary policy. In the U.S., do threats against the independence of the Federal Reserve concern you? Or is it just a lot of political theater?
It does concern me. The Federal Reserve needs to be able to do its job without worrying about political consequences.
It’s important that Wall Street and Washington, DC get out of the mindset of wanting lower interest rates, just because it might help the stock market. That’s myopic thinking that could cause economic damage down the road.
There is such a thing as inflation, and those of us who can remember the late 1970s know how important it is to keep inflation in check. I think that many investors have gotten complacent about inflation. Rising prices erode wealth over time.
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