Energy Will Eventually Come Back

09/17/2008 12:00 am EST

Focus: ETFS

Peter Way

Founder and CIO, Peter Way Associates

Peter Way, editor of the Block Traders’ Oil & Gold Monitor, says energy’s decline is only temporary.

Recent measures of open interest in crude oil futures on the Nymex add up to about $139 billion. Half of that is in June and December contracts, where we believe trading is dominated by energy industry hedgers.

Probably a fair estimate of interest in and influence over the crude oil open interest is about two-thirds energy industry and one-third financial community. But that alone may not adequately measure the influence on prices; the financial community may have considerably more market muscle here than the worldwide energy community.

At present the notions of demand “destruction” by high gasoline prices here in the US encourage the likelihood of lower crude prices for a while. With lower prices benefiting the political party presently in control and the December contract appearing well before the coming Presidential election day, there are other than pure supply and demand reasons to be considered.

While we believe lower crude prices are likely here in the interim, we see the 2009 forecasts. The gas-guzzling SUVs are still out there, being driven, because they can’t be sold at reasonable prices. Even if they could be, they would still be driven. Few Harleys and Vespas are available to take their places.

And Tata Motors (NYSE: TTM), with his $2,500 car and a billion potential customers, is not going away. There are 1,866 companies listed in China as bicycle producers, suggesting an opportunity still exists to find some converts to motor vehicles among their past customers. This is the flip side of “demand destruction.”

If you can stand a month or two hiatus, crude price increases are on their way. Many energy stocks and ETFs are now selling at prices that do not reflect that likelihood. They may get cheaper. Waiting for that to happen may cause you to miss the present opportunity.

Among exchange traded funds focused on energy, the bigger direct plays here are US Oil Fund (Amex: USO) and US Gasoline Fund (Amex: UGA), ETFs holding Crude Oil and Gasoline futures, but they may entail some more interim volatility than ETFs of energy stocks.

Present weakness in crude has put MarketVectors Coal ETF (NYSEArca: KOL), a fund of alternative energy sources (coal) down in price to a point of odds-on price recovery with big gain potentials if you can stand some temporary down side exposure.

The other history-vetted opportunity in the ETF group is in gold, with the Market Vectors Gold Miners ETF (Amex: GDX).  Both it and USO have the same upside-to-downside [prospects when it comes to] reward: risk tradeoffs, [and] they both easily meet our minimum prospect of a 5% gain in three months.

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