2014 is going to be a good year for oil and natural gas prices. And if you own the right oil and gas stocks, you’ll do pretty well, too…
This isn’t just some feeling I have. I’m not throwing ideas against the wall to see what sticks.
Over the next few minutes, I’ll tell you exactly why West Texas Intermediate crude (WTI) prices will hit $120 a barrel this year. And I’ll tell you why natural gas prices will average above $4.50 per mcf (the average over the last three years has been around $3.50).
Even better, I’ll tell you the best ways to make money on these inevitable price moves.
Let’s start with a chart from the awesome research team at Bespoke Investments…
Now, like any chart, this one requires some explanation. What you’re looking at are the 11 sectors of the S&P 500 and the percentage of the stocks within each sector that were trading above their 50-day moving averages at both the end of February (red) and the end of March (blue).
The 50-day moving average is a standard measure of bullish trend momentum. It’s a good tool to see what investors are buying… and selling.
March was a rough month for momentum stocks. Small-cap stocks in general got creamed. It was particularly bad for tech and health care/biotechs.
But even household momentum names like Netflix (NASDAQ: NFLX) got nailed. Netflix put in a 10-day losing streak and followed it up with a six-day losing streak.
All told, it dropped from $450 to $350. It broke below its 50-day moving average at $412 on March 21.
Tesla (NASDAQ: TSLA) shares also fell in 14 of March’s 21 trading days. It fell from $250 a share right to its 50-day moving average of $206.
Bull Market Over, Or…?
Investors take note when the momentum stocks start to sell off because that’s how corrections begin. And there’s been plenty of reason to think a correction might be brewing…
There’s Russia, there’s China’s credit problems (which affect emerging markets too), there’s the taper, and so on.
But let’s look back at that chart…
Between the end of February and the end of March, investors moved out of momentum/growth sectors like consumer discretionary, technology, and health care. They moved into defensive sectors like telecom and utilities.
Curiously, they also moved into materials, energy, and financials. These are not defensive sectors. Sure, we can say financials are a bet on higher interest rates and better dividends after the latest stress tests…
But energy and materials? These are both cyclical bets that will only do better with better economic growth. (Materials include oil and oil production, as well as chemicals, steel, copper, gold, and aluminum.)
That’s because, with materials, costs are fixed. Mining costs don’t change much if the economy is flat or booming. Same with oil drilling costs and smelting costs. All the companies in the S&P 500 Material Sector need higher prices to make more money.
The bottom line is you don’t buy materials and energy if you think the economy is slowing.
So I conclude that the sell-off in momentum stocks (biotech, small-cap, tech, etc.) is profit-taking after valuations got notably stretched. And make no mistake — this is healthy behavior, as it suggests investors are aware that valuations matter.
When they say Netflix actually deserves a P/E of 300, that’s when we should worry.
Bull Market for Oil & Gas
It was a nasty winter — the coldest in 32 years — and it’s still not done. It’s supposed to be back in the 40s by Friday here in Baltimore. The cold took its toll on both oil and gas supply.
With oil, it’s harder to complete wells when the weather is nasty. Oil supplies have seen net drawdowns for eight weeks running and are 42% below last year’s levels, according to Bloomberg. Throw in the Ukraine/Russia tension, and you’ve got a perfect recipe for higher oil prices.
I say oil hits $120 a barrel this year. And if global GDP does a bit better than expected, oil could trade even higher…
The situation is just as bullish for natural gas.
I’ve written here in Wealth Daily before that natural gas stockpiles are at 11-year lows. Americans used the most natural gas in a winter since they started keeping records in 1995. The supply deficit is 51% below the five-year average.
Now, gas producers need to add 3 trillion cubic feet of gas to storage this summer. And it’s going to take prices between $4 and $4.50 per mcf to do it.
Because if prices aren’t strong, some much-needed gas will simply not be pumped because it would come at a loss for the company.
No doubt, at $4.50 per mcf as opposed to $4 or $3.50, some natural gas companies are going to do really well this year…
I’m recommending a $5.50 nat gas company to my Wealth Advisory subscribers. Big money is buying into this beaten-down producer. One notable hedge fund manager has bought 18% of this company — 31 million shares at an average price of $14.50.
Of course, that means he’s losing money… but probably not for long.
This particular hedge fund guy is famous for turning struggling companies around. And I’m betting he does the same with this $5.50 nat gas producer. Needless to say, a 163% run to $14.50 would be pretty sweet.
If you’re interested, you can learn more right here.
Until next time,
Until next time,
Briton Ryle
@BritonRyle on Twitter
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A 21-year veteran of the newsletter business, Briton Ryle is the editor of The Wealth Advisory income stock newsletter, with a focus on top-quality dividend growth stocks and REITs. Briton also manages the Real Income Trader advisory service, where his readers take regular cash payouts using a low-risk covered call option strategy. He is also the managing editor of the Wealth Daily e-letter. To learn more about Briton, click here.
