A Better Way to Play the Energy Sector

06/21/2011 2:00 pm EST


Richard Band

Editor, Profitable Investing

The long-term trend is up for crude oil, as emerging markets continue to stoke demand, but oil futures and ETFs can be too volatile for many investors, says Richard Band of Profitable Investing. In this exclusive interview with MoneyShow.com, Band explains his preferred way to take on the energy markets.

Recently, we’ve seen oil prices of Brent Crude over $120 a barrel. Gasoline prices are a near $4 a gallon, over $4 a gallon in many places. A lot of speculation in the market. What do you think is going on with energy, and how should investors be playing it?

I think we’re looking first of all at a phenomenon that has been going on for ten or 11 years now, and that is tremendous growth of energy usage in the emerging markets. That’s really at the bottom of this.

Yes, we’ve had supply disruptions in Libya and things like that, but those are really kind of side issues. The big factor here is that the emerging markets are growing—China is growing, India is growing and demanding more fuel.

But, let me stop you with that. We’ve seen that, but we’ve seen growth maybe slowing a little bit in those countries—and more importantly, the level of speculative buying in the energy pits is three or four times what it was back in 2008, when everybody was worried about market manipulation.

Excellent point.

So, I mean, where do the fundamentals end and the speculation begin?

Well you’re kind of priming here for a big prediction, and that is that I think we’re going to see a big slowdown in demand from China, particularly over the next year or 18 months.

I think the Chinese economy is vastly overextended, and at some point there is going to be a drop in energy demand from China. That, I think, is going to put a huge crimp in the price of oil and other commodities, so be prepared for a big spike downward in commodities, much as we saw in 2008.

We have recently seen some increase in margin requirements, and that may be having some impact. But if we see some kind of decline in China, and gas prices start going down here, wouldn’t that be good for the domestic US economy?

I would eventually. These things take time to work through.

Yes, lower gas prices would stimulate the US economy again, and so I think it probably would help us to avoid another recession and that would be very welcome. But actually, from an investment point of view, I don’t play with a lot of these highly volatile things like oil futures and oil exchange traded funds. There are other vehicles that I prefer.

Can you name very quickly one that you like in the energy sector?

In the energy sector, I still love the master limited partnerships, my favorite being Enterprise Products Partners (EPD). It’s a simple toll-taker business. They own pipelines, so every time natural gas or oil is shipped through their pipelines, they collect a fee.

I love it. You can reach out your hand.

It doesn’t matter how many dollars a barrel it is or anything?

Not at all. It’s a volume play. Pay me my toll...so that is a wonderful company. It’s made a lot of money for my subscribers, and I still like it.

Very quickly though, those energy master limited partnerships have really had quite a nice run, haven’t they?

They’ve had a nice run—and that’s why you have to be disciplined. Most of them, I think, are a little overextended here, but EPD is still yielding almost 6%…and you’re paying essentially nothing in current income taxes because your dividend is largely tax-deferred.

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