While the drift down from $100 was not totally surprising, Elliott Gue of The Energy Strategist believes the market is too tight to stay down for long, and shares two of his top plays in this exclusive interview with MoneyShow.com.
Elliott, we’ve seen a nice roller coaster for energy prices. The price of oil went well over $100. They really came down into the low 80s—I don’t know if it got to the high 70s, but into the low 80s in the middle of the market panic in the summer. What do you think? What’s going to happen with them?
Well, I’ve kind of been thinking oil prices would come down off those highs. We simply got too high too fast.
I mean, you’re talking about West Texas Intermediate crude oil being in the down in the 80s. Brent crude oil has actually been trading at a big premium. That’s sort of the international benchmark.
Brent got up to almost $130 a barrel at the highs in the spring. That’s a level where you really start to see consumers get crimped a little bit. We definitely saw that in the US…the retail sales figures were pretty poor when oil prices were very high.
But I do think that the underlying supply/demand balances, which are driving this market, remain to a large degree. You still have Libya off the market. That’s 1.5 million barrels a day of light sweet crude oil, very difficult for the world market to offset.
Well, Saudi Arabia has stepped into supply some of that, haven’t they?
They certainly have. The one problem Saudi Arabia has, well two problems with that. One is that they don’t necessarily have the same quality of crude oil that Libya does, so it’s not necessarily a direct one-for-one swap.
The other thing is that Saudi Arabia is home to most of the world’s fair capacity. This is just oil production that could be brought on stream and sustained. Ironically, sometimes when they increase production, it makes traders more worried because they are actually shrinking that spare capacity.
They’re tightening the rubber band. It’s so tight.
Absolutely, and so any supply shock or temporary increase in demand for whatever reason would be tough to offset.
So, what about consumer demand? What are we seeing in that? I know we are seeing some slowing of growth in some of the emerging markets. We’re seeing higher inflation in China, growth coming down in China, some of the other markets. We’re starting to see that. How is that affecting oil and energy?
Well, the demand is coming off a little bit. Most of the demand loss that we’re actually seeing is probably coming from the developed countries. Obviously, the US has definitely slowed down this year. I think some of that is due to sort of temporary factors that are sort of head winds for the economy.
Chinese economic growth has come down. It’s still quite strong—and ironically what’s going on in the United States and Europe right now, this debt crisis, these concerns about the economy, may actually prevent the Chinese or encourage the Chinese not to do too much additional tightening.
This may actually take a little bit of pressure off the Chinese going to the back half of the year. I think the economy is going to do quite well, and I still think you’re going to see a lot of demand growth.
Certainly over the next few years, looking at a little bit longer term, fundamentally what you have is a country where people’s disposable income and wages are growing very rapidly. They’re hitting that sort of level where they can first afford to buy cars. I think energy demand is going to go up in China on a secular basis in coming years.
At the same time, supply growth has been pretty disappointing. In OPEC, there is not a lot of spare capacity, and in non-OPEC countries, actually the revisions in their supply growth have been larger on the downside than the loss in demand, so we’re actually seeing supply come down faster than demand.
Okay, so assuming you’re right and there’s a bounce back in energy prices, can you give us one investment that people should look at to profit from that?
Sure, I think that one sector that really had great second-quarter earnings—of course, not many people noticed with what was going on in the market after those earnings came out—but it is really the oil-services sector. A big name like a Schlumberger (SLB), or a Weatherford (WFT).
What we’re starting to see is the North American business has been booming for some time—mainly related to these unconventional shale oil and gas fields—but now the international business is really surging. We’re seeing big oil and gas companies, both state owned and private, going out and spending more money on exploration and development of their fields.
That money translates directly into business for the services companies. They handle all of the basic things that go into drilling a well or exploring for oil.
Now, do you own either of these companies personally or professionally?
I own both Schlumberger and Weatherford.
