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Where's Energy Headed in 2009?

By David Smith - Updated Apr 5, 2017 at 7:53PM

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Nothing suffered ups and downs like energy in 2008, but what about 2009?

If you're squeamish, at least the coming year shouldn't subject your energy stocks -- and you, their owner -- to as wild a ride as 2008 did. That's the good news. On the other hand, at this time next year we could still be wondering when the sector will finally begin to recover.

Both consumers and investors were affected by energy-related events over the past year. As 2007 ended, the per-barrel number for light sweet crude was near $90.

Why the 2008 bounce?
For lots of reasons that still aren't completely clear, the levy continued to run up to its now infamous high of $147 in July, only to begin a steep slide into the $30s that may not have ended yet. There are those who still maintain that the severe price fluctuations were tied solely to supply and demand, since demand growth seemed to be unstoppable in the developing nations -- especially China and India. There was also a growing concern that the world's production had peaked, a combination of factors that could have led to supply shortages and further price run-ups in the near term.

And then there were those who blamed the price speculators -- financial types who bought and sold quantities of oil without ever intending to take possession of them. As I sit here in December, attempting to sort out the crazy energy year, however, it seems to me that there was no single cause for the roller-coaster pricing. Now, as we prepare for a new year, the lingering price slide is being propelled by souring economic conditions and pessimism about GDP growth across the planet.

Topsy-turvy share prices
Just as 2008 has been a topsy-turvy year for crude prices -- and their natural gas brethren -- stability in the share prices of producers and service companies alike has been hard to find:

 

12-31-07

06-30-08

12-24-08

BP (NYSE:BP)

$69.23

$67.39

$44.17

Chesapeake (NYSE:CHK)

$39.02

$65.83

$15.18

Chevron (NYSE:CVX)

$90.57

$97.54

$69.62

ExxonMobil (NYSE:XOM)

$91.87

$87.18

$75.78

Halliburton (NYSE:HAL)

$37.48

$52.69

$16.72

Schlumberger (NYSE:SLB)

$97.30

$106.75

$38.22

Transocean (NYSE:RIG)

$143.15

$152.39

$42.24

But where do we go from here? Longer term, most forecasters remain bullish on global demand, and ExxonMobil is convinced that by 2030 we'll have seen 35% growth in the world's energy demand over the prior 25 years. Fine, but what about the next year to 18 months?

Predicting the unpredictable: 2009
Just as you couldn't have found anyone who might have accurately predicted the strange energy events of 2008 a year ago, it's awfully hard now to locate a prognosticator with an eye for demand growth and higher prices in 2009. Indeed, the Energy Information Administration arm of the U.S. Department of Energy thinks that world demand will slide by about 50,000 barrels per day this year, followed by a decline of 450,000 daily barrels in 2009. As such, 2008 would mark the first time in 25 years that the world's thirst for energy has shrunk.

And while much of the shrinkage can be tied to the U.S., demand growth isn't even assured in China. That nation's crude imports actually dropped in November by 1.86% from the prior year, after surging in October at the highest pace since July 2007.

Other possible effects
At the same time, the sharp price declines are resulting in political difficulties in a host of countries, including Russia and Iran, both of which have benefited from higher prices until recently. In fact, with about 80% of Iran's budget tied to crude exports, we can only hope that energy-induced unrest doesn't lead to geopolitical turmoil.

Closer to home, a growing number of oil and gas projects have been shelved for cost-benefit reasons. This has been especially true in Canada, the largest supplier of crude to the U.S. Much of that country's crude comes from Alberta's oil sands, whose production costs are now far higher than the value produced. So don't be surprised if shelved programs across the planet lead to production shortages and a rebirth of price inflation sooner than most of us expect.

Don't clean out your energy closet
With all this going on, how should you treat your energy investments in 2009? As the table above makes clear, the sector's members have become cheap. And given the importance of the group, your portfolio should include some energy representation. My inclination is to select perhaps a couple of solid names and build positions that you won't touch for at least a year.

In my case, the names would be ExxonMobil, with its strong balance sheet, and Schlumberger, the king of the oilfield services beasts. Both, it seems to me, stand to be among the first to benefit when the group starts a recovery.

Schlumberger and ExxonMobil wear five and four stars, respectively, as awarded by Motley Fool CAPS players. Why not check in with your opinion on the pair?

For related Foolishness:

Chesapeake Energy is a Motley Fool Inside Value recommendation. Try any of our Foolish newsletters today, free for 30 days.

Fool contributor David Lee Smith doesn't own shares in any of the companies mentioned. He does, however, welcome your questions, queries, or comments. The Fool has a disclosure policy.

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Stocks Mentioned

BP p.l.c. Stock Quote
BP p.l.c.
BP
$30.16 (1.69%) $0.50
Chevron Corporation Stock Quote
Chevron Corporation
CVX
$153.41 (-0.15%) $0.23
Exxon Mobil Corporation Stock Quote
Exxon Mobil Corporation
XOM
$88.95 (0.56%) $0.50
Transocean Ltd. Stock Quote
Transocean Ltd.
RIG
$3.45 (0.29%) $0.01
Schlumberger Limited Stock Quote
Schlumberger Limited
SLB
$34.65 (-0.03%) $0.01
Chesapeake Energy Corporation Stock Quote
Chesapeake Energy Corporation
CHKA.Q
Halliburton Company Stock Quote
Halliburton Company
HAL
$28.00 (0.76%) $0.21

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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