By Jim Lowell, MarketWatch
BOSTON (MarketWatch) — If you’re trying to map out an energy investment route, you’ll be traveling over a lot of investment ground, most of it muddy.
“Energy” like “health care” is a term that masks more than it reveals about the constituent elements that comprise it. Crude oil, the commodity. Crude oil, the companies. Crude oil drillers, pipeline and service providers. Crude oil transporters. Crude oil refiners. Apply the same diaspora to coal, natural gas and alternative energy. And then there are its various and variable bank shots: from transportation to chemicals to domestic and geo-politics and economic ups and downs.
Right now, the U.S. has become a net exporter of crude oil while still struggling to refine enough in-demand distillates. Low natural gas prices are vying with the higher cost of extraction and shipping. And coal is suffering the slings of political correctness here and a still stuttering euro zone economy with slight demand build in China. Alternative energy (from wind to solar), still looks like more bust than boom. Still, I think there are ways to profit and avoid potential blowhards and blowups in the energy patch.
To do so, I’ll employ my usual sector investing preference: tactical trades wed to my pairing strategy approach. Moreover, I want to diversify across both the energy sector and the energy spectrum. The sector recommendations are conspecific. The spectrum play enables me to increase diversification along a clean-energy theme by specifically recommending an energy-focused, clean technology ETF paired with the black sheep in the energy field.
Currently and longer term, I like the recovering economy demand characteristics and supply constraints for several types of fuel. It is also inarguable that there are raw political and slightly more refined regulatory pressures here that trend toward favoring some fuel types over others. But don’t lose sight of the fact that the unfettered and unabashed needs in China and emerging Asia favor what we can afford to dislike; enough to make, for example, coal a commodity of their present and future energy plans even as it may be forced (by market opportunity and political opportunism), to play a lesser role in our own.
Market opportunity and political opportunism meet in the valorization of natural gas as the industrial, commercial and consumer fuel of least resistance. While natural gas prices are low, as noted above, the costs of producing natural gas remain high. That makes it a time to own the commodity, not the stocks in natural gas companies. But with all the headline focus on natural gas, don’t make the mistake of overlooking oil. If, as the economic data as opposed to the sequestration rhetoric suggest, we are in the midst of a domestic and global recovery, I’d expect black gold to outshine the yellow metal. And if we recover to a point where inflation pressure builds, oil prices should tend to pump higher.
We already know that prices are pumping higher for refined distillates. There is an old saw on Wall Street that says the best cure for high prices is higher prices, and this will apply to gasoline at some level — too high a price may lead to less driving and hence to lower demand and lower prices. But not now. Jobholders and job seekers are just getting back into the driver’s seat of this recovery; I think they’ll drive however long it takes and do whatever it takes to pay the toll of staying on that recovery road.
On that road, here are my pairing picks.
First: the United Natural Gas ETF /zigman2/quotes/205527422/composite UNG -1.84% — a pure play on natural gas prices, paired with the United States 12 Month Oil ETF /zigman2/quotes/209867783/composite USL +0.57% — effectively an average of 12 rolling months of oil futures contracts.
Second: United States Gasoline ETF /zigman2/quotes/201264075/composite UGA +0.87% — what better way to offset rising prices at the pump than to own some of those gains at the pump, paired with the Proshares Ultrashort Gold /zigman2/quotes/207986444/composite GLL -2.79% — this pairing is a more refined take on black gold vs. yellow gold bugs. (So long as the recovery trend is in, gold’s fear trade is out.)
Finally, I like the black sheep Market Vectors Coal ETF paired with that cleaner theme noted above, via the Powershares Cleantech ETF /zigman2/quotes/204019311/composite PZD +0.30% .
The Cleantech Index on which this last ETF is based is a version of a socially responsible investing screen. That makes it surprising that nearly 60% of this ETF’s assets are in industrial companies, with technology names (accounting for 21% of this ETF’s assets) playing to an energy theme as well. As such, it complements all the above energy commodities well in much the same way that all the above picks should complement a trader’s equity-based portfolio.