NEW YORK (TheStreet) -- There are a couple pivotal reasons that can be attributed to the past four months of plunging oil prices.
First, North American shale oil production successes combined with slackening global demand. And second, Saudi Arabia's lack of desire to cut production and willingness to discount their oil to trading partners (that's a way for the Saudis to gain back global market share and put pressure on domestic shale producers to lay down rigs as they find their operations unprofitable in this environment).
Where to Invest?
If you are in the camp that believes recent oil pricing is a function of supply outstripping demand then you may want to consider hunkering down in the midstream space in order to maintain exposure to the energy sector, but mitigate volatility.
Pipelines are considered the FedEx of the energy world as they simply deliver product from point A to point B and their income has little to do with underlying commodity pricing. They make their money much like a vehicle toll way system.
If the past is any indication of the future, then pipelines may provide some near-term opportunity vs. their exploration and production counterparts. In our last major pullback in energy beginning the second quarter of 2011 we saw pipelines -- as measured by the J.P. Morgan Alerian MLP ETN (AMJ) -- lose about 17.6% and exploration and production companies -- as measured by SPDR S&P Oil & Gas Exploration & Production ETF (XOP) -- lose about 38.6%.
Equally important to the depth of loss is the amount of time it took these names to recover. AMJ took roughly 102 days, while XOP needed 668 days to get back to even.
The takeaway? Pipelines had a shallower dive and quicker recovery so you should possibly be on the hunt for solid names in this space.
Unlike oil that is priced globally, natural gas is mostly priced in the United States. So there is no need to worry about what the Saudis or OPEC are doing with their production.
With natural gas your focus tends to be much narrower and is a function of what is happening in the US with the economy and weather.
In addition, potential catalysts to natural gas pricing in the short- to mid-term could be the ramp-up of US-based liquefied natural gas exportation as well as reduced production. An unintended consequence of oilrigs being laid down or oil wells being shut in would be a reduction in associated gas being produced from those wells.
This article is commentary from an outside contributor, separate from TheStreet's news coverage. Tyler Kocon is the portfolio manager of the Split Rock North American Shale Energy portfolio on Covestor, an online investing company. Split Rock is long AMJ at publication and does not have a position in any other stocks mentioned in this article.