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Energy: On The Ropes Again

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If you are putting together a list of the five worst performing groups in 2017, look no further than the S&P 500 Energy Sector. The Index fell 13% in the first half and it hasn’t gotten any better since then.

If you had the misfortune of owning crude, the current per barrel price around $46 has fallen 18%. It wasn’t that long ago that a barrel of crude commanded the fat sum of $105. But then it was only last year it was at a lowly $26.

The energy world has never seen such volatility in prices. Does this mean that traditional and conservative investors should continue to avoid putting money in this area? Great question, let’s take a look.

The Ripple Effect

There are plenty of people cheering over the present state of energy. Oil plays a key role in the determination of other prices. Lower crude means less inflation; perhaps even deflation. This is good for food prices, transportation and just about everything else. For the average consumer it can be like getting more dough in their paycheck.

But investors may not be cheering so fast. Energy earnings are an important component of total corporate earnings. Wall Street is all about earning expectations and one analyst Christine Short who works with Estimaze claims that if oil stays low and energy company earnings are hurt, growth expectations for the market could be cut in half. Let’s hope that Christine turns out to be overly pessimistic.

With new highs being marked nearly every week, this would not be good, to say the least.

Fracking: Disrupting The Global Economy

One of the major causes of crude price volatility is hydraulic fracturing or fracking. You will remember from your college course Fracking 101, what is involved is extracting energy from rock using high-pressure injections of water and chemicals.

Fracking is environmentally very controversial but that has not stopped the industry of buying its way into mainstream America. Sure it has had something to do with the record number of earthquakes in Oklahoma where fracking has been roaring ahead. And there are those questions about the safety of ground water near the drilling fields.

Facts of daily life like earthquakes and poisonous water are the kinds of things that get called fake news. Powerful industries can get away with it. For backers of the fracking phenomenon, it is changing the world on the way to making America great again.

US Reemerging Oil Exporter

In 2014 the United States began exporting oil for the first time in more than 40 years. Output from fracking is what made this possible. It’s no longer places like Eagle Ford Texas or Bakken, North Dakota that are getting investment attention.

Everyday there are announcements from spots in Pennsylvania, Ohio, Kentucky and elsewhere about new energy initiatives.

The economics of hydro fracking are comparatively fast and simple. Compare the time and cost of offshore drilling for energy and you start to appreciate the appeal of fracking.

One of it’s advantages is the low cost and short lead time to the start of production. Whereas offshore exploration might need prices of $60-$90 per barrel, experts have place the trigger price for fracking between $40-$50.

It’s More Complicated

It would be more than a bit naïve to suggest that the entire global energy quotient is determined by fracking. However it is worth noting that over the past two years, the trading range of crude has ranged between $43 and $57 and this matches the trigger price for fracking production.

Any boost to corporate profits this year may not be coming from the energy sector. This is just something to keep in mind when trying to figure out this record high equities market.