Thanksgiving Day Meeting
As many of you know, I have been very bullish (upbeat) from an investment point of view on companies that are directly or indirectly involved in the energy/oil sectors. The oil boom taking place in the United States of America is real and full of opportunity as we seek to invest wisely in this macro trend which I believe will be alive and well for many years to come. The technology continues to open new doors such as ”Fracking” – horizontal drilling – and other new techniques already off and running. Energy independence for the United States is becoming a real possibility – something we can see in our not too distant future if we stay on track.
So why am I writing to share this with you? – Our investment strategy has been allocated in a way to profit from this Oil Boom. We were doing just that up through this summer – then something changed! The dollar began moving up strongly in its relative value to other currencies – having a direct impact on the commodities industry worldwide. As the dollar rises – it tends to push commodities down in price on a relative basis. That was just the beginning of it. The production of oil has been increasing steadily – as the newer technologies have encouraged more production. Many of you are aware of the Bakken region in North Dakota, the Permian Basin located in Texas, and Louisiana – all of these regions have an abundance of oil and natural gas leading to increased production. The increased production along with the dollar getting stronger have created an environment leading to lower oil prices. This is now classic supply and demand playing out ~ high production = more supply than we currently have demand.
Lower oil prices have resulted in lower prices at the pump – this is great news and has been a real factor in helping US consumers out financially – having the effect of a tax cut in some ways. The restaurant industry, retailers, airlines and many other industries should be the beneficiaries of lower oil and gas prices.
So, what is the problem with this massive move up in the dollar (strong dollar is good, right?) and this unprecedented massive slide in Crude prices? Nothing, unless you are invested in the companies producing, shipping, and involved in supporting the production of Oil and Natural Gas. I made the decision to remain invested in some of these positions as they began sliding – I held on, in part, to continue receiving the dividends (must own the shares to receive the dividends) and with the understanding that historically OPEC, being responsible for over 40% of the world’s supply, have controlled to some degree the price of a barrel of oil by controlling the supply. In the past, under these circumstances they have cut production – bringing a floor under the price and have regulated production as to keep prices well over $70.00 per barrel.
Shock time – Thursday (Thanksgiving Day) the members of OPEC had their meeting – they changed course on the world (even to the detriment of some of their own members). They decided to stop price-fixing, for lack of a better word. They have stated that they will let the free market (novel idea) regulate the price of oil. Thus real supply and demand will determine the price. I believe this is great news overall and how things should work. With continued increase in production and long term increased demand – as GDP globally goes up – this should be good for all. America has a real opportunity to export in the years to come and this should be great for the jobs market and all involved.
The problem is a short term one. Many producers will have a tough time making money / being profitable if oil prices stay even this low – now in the 60’s. It is possible in my opinion that oil could drop much further for the short run – putting incredible pressure on producers. As your portfolio manager – I didn’t see OPEC making this decision as I was basing my research on their past methodology. Based on this new approach – I am currently rotating out of most of the holdings in our portfolio closely related to the energy sector.
Keep in mind this sector will provide great investment opportunities again – some sooner rather than later – but this move by OPEC is a real game changer and as a result calls for action on my part.
The good news is that there are plenty of opportunities as a result of lower fuel costs in many other sectors of the market and we will look that way for now. This is all very good long term, so please understand that I am bullish for the long term when it comes to the United States Oil Boom!
I hope you all had a wonderful Thanksgiving Day – was a bit stressful for me as you can imagine – but after all that is why you have me as your portfolio manager. Wanted you to understand the rebalancing you will see in the coming weeks – Please pray for God to bless me with wisdom and understanding as we move into the last month of 2014.
Please take a few minutes to open the link below and read the article concerning OPEC and Oil. This will shed some additional light on the matter. I think it will be very educational and encouraging as a whole for you.
Thank you all for placing your trust and confidence in us. We take our responsibility very seriously and yes, have hit a rough patch with energy this year – but we will work diligently to right the ship now.
Blessings to you all,
Michael McCracken CFP, ChFC