All Signs Point to Higher Prices For Oil and Gas
Everyone knows funds that invest in energy explorers and producers have been market leaders over the past several years. The numbers jump off the fund performance lists: more than two dozen funds had returns of more than 40% last year, and a handful of those have enjoyed compound annual rates of return of 35% or better over three years.
The reason is simple: Demand from the mature industrialized economies continues to rise, while at the same time demand from countries like China, India and Brazil is skyrocketing as their economies expand. Meanwhile on the supply side, reserves aren't being replaced as fast as they are being consumed.
Add to the equation the fact that more than one-quarter of the world's production comes from a handful of countries in the Middle East that can barely get along with one other, let alone the rest of the world.
Many other exporters have their own sets of political and social problems, including Russia and other countries that were part of the former Soviet Union, such as Azerbaijan, as well as nations like Nigeria and Venezuela. Indeed, oil prices seem to jump on any news of uncertainty.
All told, there is little reason to expect anything other than higher prices for oil and gas.
Canada, of course, is the major supplier to the U.S. and is investor-friendly, particularly since no government is likely to repeat the late Prime Minister Pierre Elliott Trudeau's political faux pas of 1980 when he introduced the National Energy Program. It hurt investment and employment in Alberta, and continues to be reflected in the number of Liberal MPs Alberta sends to Ottawa.
Canada's oil fortunes can be seen in Canadian resource fund returns. That's the good news. The bad news is that nothing goes up forever, and energy prices will prove no exception. Prices are volatile and this will be reflected in short-term investment returns.
The worst case scenario over the next couple of years would be a recession brought about by any number of things such as a drop in real estate prices, the U.S. foreign trade deficit, the U.S. budget deficit or simply the impact of rising energy prices. After all, if a family has to pay an extra $50 a week to fill up their car's gas tank or heat their home, or pay higher prices for goods that have become more costly due to higher energy prices, spending on other items declines. Add in a bit of inflation and a few more jumps in U.S. interest rates to these factors, and the end result will be a slide in stock prices.
Stock market cycles are normal and, historically, market declines-- no matter how steep -- are followed by gains that push market indices to higher levels. That's fine for people who can take a long-term view of the markets and for investment professionals who are astute enough to build up cash reserves to invest when the markets tumble. But if you've reached that age where capital preservation has become the paramount objective, then perhaps you might wish to limit your exposure to any one area of the economy -- especially one that has tended to be volatile.
If your portfolio consists primarily of Canadian equity funds that tend to parrot the S&P/TSX 60 or S&P/TSX Composite indices, you already have more than 26% exposure to the energy sector. You can reduce your exposure by diversifying into foreign markets, where energy is not a major component, or by adding fixed-income investments or funds that concentrate in other specific sectors like banking or healthcare.
On the other hand, if you want to speculate even more on energy, there are dozens of funds to choose from. If these are too tame, you have your choice of a number of energy royalty trusts, which hold oil-and-gas-producing properties and distribute cash. Just make sure you understand the accounting and recognize the risks involved.
Higher on the potential risk scale are hedge funds that tend to play in commodity futures and like to bet on moves in energy prices. You can make a killing in these -- or be killed. So, again, understand what you're getting into and make sure you can afford the risks.
If you are approached to invest in a private deal, be wary, unless you have some expertise is this area. Some 25 years ago while I was Investment Editor at the Financial Times of Canada, a colleague received a call from a physician who wanted to share his good fortune by investing in a company that was to engage in natural-gas exploration in northern Ontario. He was somewhat surprised when we told him that Sudbury was not a promising location for natural gas.
MorningStar
The reason is simple: Demand from the mature industrialized economies continues to rise, while at the same time demand from countries like China, India and Brazil is skyrocketing as their economies expand. Meanwhile on the supply side, reserves aren't being replaced as fast as they are being consumed.
Add to the equation the fact that more than one-quarter of the world's production comes from a handful of countries in the Middle East that can barely get along with one other, let alone the rest of the world.
Many other exporters have their own sets of political and social problems, including Russia and other countries that were part of the former Soviet Union, such as Azerbaijan, as well as nations like Nigeria and Venezuela. Indeed, oil prices seem to jump on any news of uncertainty.
All told, there is little reason to expect anything other than higher prices for oil and gas.
Canada, of course, is the major supplier to the U.S. and is investor-friendly, particularly since no government is likely to repeat the late Prime Minister Pierre Elliott Trudeau's political faux pas of 1980 when he introduced the National Energy Program. It hurt investment and employment in Alberta, and continues to be reflected in the number of Liberal MPs Alberta sends to Ottawa.
Canada's oil fortunes can be seen in Canadian resource fund returns. That's the good news. The bad news is that nothing goes up forever, and energy prices will prove no exception. Prices are volatile and this will be reflected in short-term investment returns.
The worst case scenario over the next couple of years would be a recession brought about by any number of things such as a drop in real estate prices, the U.S. foreign trade deficit, the U.S. budget deficit or simply the impact of rising energy prices. After all, if a family has to pay an extra $50 a week to fill up their car's gas tank or heat their home, or pay higher prices for goods that have become more costly due to higher energy prices, spending on other items declines. Add in a bit of inflation and a few more jumps in U.S. interest rates to these factors, and the end result will be a slide in stock prices.
Stock market cycles are normal and, historically, market declines-- no matter how steep -- are followed by gains that push market indices to higher levels. That's fine for people who can take a long-term view of the markets and for investment professionals who are astute enough to build up cash reserves to invest when the markets tumble. But if you've reached that age where capital preservation has become the paramount objective, then perhaps you might wish to limit your exposure to any one area of the economy -- especially one that has tended to be volatile.
If your portfolio consists primarily of Canadian equity funds that tend to parrot the S&P/TSX 60 or S&P/TSX Composite indices, you already have more than 26% exposure to the energy sector. You can reduce your exposure by diversifying into foreign markets, where energy is not a major component, or by adding fixed-income investments or funds that concentrate in other specific sectors like banking or healthcare.
On the other hand, if you want to speculate even more on energy, there are dozens of funds to choose from. If these are too tame, you have your choice of a number of energy royalty trusts, which hold oil-and-gas-producing properties and distribute cash. Just make sure you understand the accounting and recognize the risks involved.
Higher on the potential risk scale are hedge funds that tend to play in commodity futures and like to bet on moves in energy prices. You can make a killing in these -- or be killed. So, again, understand what you're getting into and make sure you can afford the risks.
If you are approached to invest in a private deal, be wary, unless you have some expertise is this area. Some 25 years ago while I was Investment Editor at the Financial Times of Canada, a colleague received a call from a physician who wanted to share his good fortune by investing in a company that was to engage in natural-gas exploration in northern Ontario. He was somewhat surprised when we told him that Sudbury was not a promising location for natural gas.
MorningStar
posted by Ottawa Gas Prices | 10:02 PM
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