Don't bet against the long-term energy cycle.
The recent swoon and volatility in both energy commodities and equities have unnerved many. However, instead of worrying, your time is better spent developing a plan to play defense before the next opportunity arises to play offense in the energy space.
Fundamentals suggest there's still plenty of game left in the sector.
Temporary Fumble
High prices in the oil patch may slump temporarily, but demand for crude oil and products remains robust.
In fact, demand continues to creep higher from a base of 84 million barrels per day.
Without additional supply in the coming years, this trend will push the current limits of global production, now in the range of 85 to 86 million barrels per day.
Some have argued that gasoline demand dropped as a result of high prices in recent months. In fact, the data indicate otherwise.
When gas prices rose from $2 to $3 a gallon in the U.S., consumer demand remained surprisingly strong. Recent declines in demand are the result of typical seasonal patterns, namely a slowdown in driving as the summer-vacation season winds to a close.
Demand for crude, both domestically and globally, remains firm and should stay brisk for the foreseeable future.
Developing countries like China and India remain wild cards, but most signs point to increased consumption.
China's demand for crude may fluctuate from year to year, but continued infrastructure development will make it difficult for current supply patterns to satiate China's growing appetite for crude. Countries like India and many of the states of the former Soviet Union are also likely to need additional crude oil, albeit from a much smaller base than China.
That said, the decline in crude prices remains unsettling to some.
In fact, seasonal patterns, combined with the "dormancy" of geopolitical tensions around the globe -- have changed the short-term momentum in crude prices. As a result, the argument that Jim Cramer and others have made -- that the energy rally is over -- seems prescient.
Yet the longer-term fundamentals have not changed.
Christopher Edmonds
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