The business pages of last Friday's New York Times called it a "perfect alignment of stars," but for the typical American driver, the confluence of events that led to 2005's overheated fuel prices was more like the perfect storm.
To be fair, the Times article (registration required) characterized the oil supply and demand imbalance from the point of view of OPEC, and it suggested that 2006 may well be a different story, one which could have a happier ending for folks on the fill-'er-up end of the pump. Indeed, the tail end of 2005 has already seen oil prices fall significantly. After topping off at roughly $70 earlier this year, a barrel of crude now hovers around the $61 mark.
Will oil prices fall further? If so, what will that mean for the likes of ExxonMobil
Make the call?
Far be it from me to try to make a market call, but commodities being commodities, prices are bound to ebb and flow. And with all the recent flowing, it seems logical to suspect that a little more ebbing might be in order.
Despite their recent decline, after all, oil prices remain stubbornly high, a dynamic that tends to put an eventual crimp in demand. Moreover, as producers continue pulling out all the stops to tap into the industry's currently outsized profits -- and as new and hurricane-disrupted supplies come online -- lower prices should result. So says our free-market ancestor Adam Smith, at least.
But when?
Make no mistake: Market cycles are hardly elegant mathematical formulas, especially where commodity prices are concerned. I don't anticipate that 2006 will be the year the bottom falls out of the market for fossil fuels. That may not occur until the world's last oil patch has been pumped bone dry, and for now anyway, the demand side of the energy equation doesn't appear poised for a dramatic downtick. Indeed, according to the Times article, analysts expect demand to increase a bit over the upcoming year.
Still, I think that energy-centric stock investors should cool their jets.
Enough is enough
For starters, folks looking to ramp up their exposure to the sector, which is one of the market's most volatile, should contemplate how significantly invested in energy they already are.
How much is too much? Consider that the S&P 500 currently sports a roughly 10% allocation to the sector, and gauge your own portfolio accordingly. Moreover, if you ultimately decide that you do want to tilt your investments further in the industry's direction, be sure you can explain to yourself in a paragraph or so why you think that's a smart idea. By and large, your investment thesis should have more to do with a company's track record of operational efficiency and reserve growth than with the price of a barrel of crude.
Beyond that, given Big Energy's long season of earnings gushers, I think even the most rabid of the sector's fans should curb their enthusiasm. After all, when the time comes in 2006 to do the year-over-year number crunching, the industry will have a difficult time measuring up to this year's earnings model. The encore, in other words, may well be a letdown.
Land of better opportunities
With that in mind, now may be a fine time to consider harvesting gains (as the pros like to say) and redeploying them to underappreciated areas of the market. Intel
That power trio is just the tip of the proverbial iceberg, however, when it comes to homing in on stocks that may have more juice than energy equities do these days. Indeed, investors of the growth persuasion should check out David Gardner's Motley Fool Rule Breakers newsletter for a list of prospective contenders, while all you cheapskates out there (yes, I'm talking to you) contemplate the list of recommendations that Philip Durell has put together for his Motley Fool Inside Value subscribers.
Small-cap fans, meanwhile, likely already know that Tom Gardner and his crew over at Motley Fool Hidden Gems have been delivering the goods for their subscribers since July 2003, beating the market by more than 20 percentage points since launch.
Don't get me wrong: There are doubtlessly still gains to be pumped out of the energy industry. For now, though, I think the market's low-hanging fruit, um, hangs elsewhere. You just have to know where to pick it.
Further Foolishness from the oil patch:
Home Depot is a Motley Fool Inside Value pick.
Shannon Zimmerman is the lead analyst for the Motley Fool Champion Funds newsletter and doesn't own any of the securities mentioned. The Fool has a strict disclosure policy.
