Will the Glut Create Opportunities?

10/13/2014 12:01 am EST

Focus: COMMODITIES

Jim Jubak

Founder and Editor, JubakPicks.com

The glut in the oil and natural gas market is having a major impact on energy flows, says MoneyShow's Jim Jubak, who has one main worry about this trend.

Okay, so what we're looking at here is this incredible glut in the energy market, in the oil market, and in the oil and natural gas market, that this is the downside of the big boom in US energy, that we've got the US importing less, actually exporting some products when it can get around the export band and you've got global demand not growing very much, so you're seeing real big shifts in oil flows. Nigeria, for example, which used to export its very light crude to the United States, is not exporting at all to the United States because this is exactly what the shale deposits are producing in the US. We're seeing demand hold up pretty well for the Saudis because they produce a heavier oil, which is actually what a lot of refineries around the world were built to run, but we're seeing oil prices come down. We're not seeing demand pick up. We're, in fact, seeing prices continue to slide and at some point we're going to start taking some of the marginal high cost producers, such as Canadian Oil Sands, some of the high cost producers in the US energy boom, some of the Australian producers, all those are starting to feel some of the pressure. We're starting to see some cancellation of projects. The real worry here is that we don't know exactly how long this is going to go on, real worry if you're an investor in energy companies.

I wouldn't suggest—right now—that you pile into this sector because I think as long as demand is continuing on the downside, we're going to see oil prices continue to fall. People like the Saudis have actually said that they're going to keep producing, or even maybe actually ramp-up production because they want to keep market share. They don't want to be supplanted in the market, so there are really no cuts in global supply coming. We're seeing weak demand and I think that means that energy prices continue to fall. That's good for consumers. That's good for people at the gas station, but it's certainly not good for the stocks in the energy sector. If you got a slightly longer time span, I think you can still count on certain things in the US sector.

I think that you can still count on companies like Cheniere—Cheniere Energy,—symbol (LNG), eventually exporting liquefied natural gas for the United States. The stock is getting pounded right here. You can look at the fracking sand producers, who are also getting pounded right here, ACLP being one of them, because people are saying, “Well, if there's going to be a decline in oil prices, wouldn't there be a decline in drilling?” No, because you've got fixed capital costs. You're actually seeing a continued demand because these companies have to keep their cash flow going, but nonetheless all these stocks are going down along with the sector and I really wouldn't try to catch a falling knife or a falling barrel of oil right yet.

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