Mutual Funds by John Waggoner
This is John Waggoner's latest newspaper column,
published Jan. 29, 1999.
Cheap oil pumps up fund opportunities
Oil is so cheap now that if Jed Clampett discovered crude, he'd
barely be able to move next door, much less to Beverly Hills. But
this might be a good time to invest in natural resources funds, which
buy stocks of oil, gas, timber and similar companies.
The American Automobile Association says a gallon of regular unleaded
gasoline costs 97.6 cents a gallon, on average - lowest price since
1979 and less than the cost of a gallon of bottled water. At $12.08 a
barrel, west Texas intermediate crude costs less, adjusted for
inflation, than at any time since the Depression, says the American
Petroleum Institute (API).
Oil prices have been driven lower by worldwide overproduction and a
drop in Asian demand. Falling oil prices, in turn, have hurt oil
stocks. The Standard & Poor's oil and gas drilling index is down 53%
the past 12 months; S&P's domestic oil company index has fallen 23%.
The S&P 500 stock index, in contrast, is up 31%.
So why would anyone want to invest in oil stocks?
For the moment, there's no reason. But by midyear, we could see crude
rise to $15 a barrel or more - and that could send natural resources
mutual funds soaring.
At current prices, oil isn't very profitable to produce, says Mark
Baskir, manager of Strong Limited Resources Fund (1-800-368-3863).
"At $12 a barrel, forget it!" he says. The number of rigs looking for
oil in the USA fell to 155 in December, lowest since records were
started in 1950, API says.
Until demand turns around, international oil production isn't likely
to increase much. The Organization of Petroleum Exporting Countries
cut production modestly last year. Iraq may boost production, but not
enough to offset cuts elsewhere. For example, most U.S. stripper
wells - those that produce 10 barrels of oil a day or less - have
shut down. And they accounted for about a quarter of U.S. oil
production, Baskir says. Keeping a further lid on production is an
estimated 200 million barrels of oil in storage worldwide.
But if Asian economies recover, oil consumption will pick up,
boosting prices. Before the economic crisis, Asia accounted for 42%
of the growth in projected oil demand, says Charles Ober, manager of
T. Rowe Price New Era Fund.
And most managers agree natural gas prices could strengthen this
year, as that industry works off inventories. "From Labor Day on, we
could see much stronger natural gas prices," says Michael Hoover,
manager of Excelsior Energy and Natural Resources Fund (see chart).
There's no such thing as a drop-dead layup in commodities prices. But
if you believe the argument for moderately higher oil and gas prices,
a natural resources fund might be an interesting play. Those
interested purely in natural gas might consider American Gas Index
Fund (1-800-343-3355), which invests entirely in natural gas stocks.
More aggressive investors might look for funds with a penchant for
oil services companies. Those companies lease oil rigs to other
companies or produce equipment for oil drilling. Typically, oil
services stocks soar when oil prices rise, and implode when oil
prices fall. One such fund is State Street Research Global Resources
(1-800-882-0052), which specializes in small to midsize oil drillers
or producers. The fund soared 70% in 1996, but plunged 48% last year.
Fidelity Select Energy Service, leading fund in the chart, invests in
companies that provide services and equipment to energy companies.
Other funds in the chart are more diversified natural resources funds
with significant exposure to energy stocks. That point is important:
Some funds have large bets on metals or mining, two depressed sectors
that are unlikely to break out of their funk soon. If you have
questions about a fund's holdings, call and ask.
This investment can wait until you see the stocks start to rise. In
energy, things can always get worse.