Energy and Commodities: 2011 & 2012
by David Fessler, Investment U Senior Analyst
Wednesday, December 21, 2011: Issue #1669
As my colleagues have done earlier this week, I’m now putting myself in the hot seat with regards to my prognostications from a year ago.
Around this time last year, I opined that commodities like gold, silver, fertilizers, coal and oil were in increasingly short supply. Prices for these and other commodities were approaching 10-year highs, and would keep on rising.
How did that statement pan out? Let’s take a look.
Precious Metals
According to data from Kitco, gold started the year around $1,400 per ounce, and is currently trading at just over $1,600 per ounce.
Silver, on the other hand, started the year at $30.70 per ounce, and now trades a tad lower in the $29.50-per-ounce range. It was what silver did during the year that made all the headlines.
Back in April, it hit a high of $48.70 per ounce. The scale and speed of the decline after the April high suggested institutional dumping of the metal. Prior to the sell-off, silver was widely viewed as another safe haven (like gold) against money printing.
Fertilizers
Fertilizer prices, according to data retrieved from ycharts.com, were up 41.54 percent over the last year. Ironically, fertilizer stocks didn’t fare so well. Potash Corporation (NYSE: POT) shares are 22.5 percent lower since January. Mosaic Company (NYSE: MOS) didn’t fare much better, declining 35 percent since the New Year.
I expect fertilizer demand to continue rising throughout 2012, making these stocks (which trade with P/E ratios of 12 and eight respectively) absolute bargains.
Fossil Fuels
Coal, which started the year at $80 per metric ton, sits around $82.85 per metric ton as I write this, or a gain of about 3.5 percent. Concerns over global recession have weighed on the price of coal.
How did shares of coal companies do over the same time period? In a word, they got hammered. Shares of Arch Coal, Inc. (NYSE: ACI) dropped 58 percent for the year. Walter Energy, Inc. (NYSE: WLT), a big metallurgical coal producer, lost 52.5 percent of its share value since January. In the face of lethargic demand here, U.S. producers are increasingly turning to exports to try to bolster their bottom lines.
Lastly, let’s talk about oil. According to ycharts.com, back in January, West Texas Intermediate (WTI) was trading for $87.81 a barrel. Now it’s $97.25 a barrel – up 11 percent. Brent was $89.54 back in January, and is now at $106.91 – an increase of 19.3 percent.
Since most of our gasoline and diesel is refined from Brent, it’s no small wonder gasoline prices have stayed high. You can expect oil prices to slowly move higher through 2012, with gasoline prices following along. And unfortunately, $4.00 a gallon gasoline is coming back in 2012.
Had you purchased the right oil stocks, however, you would have taken a little bite out of your gasoline bill. This is especially true for the domestic pipeline master limited partnerships (MLPs).
Kinder Morgan Energy Partners LP (NYSE: KMP) was up 15 percent for the year, not including its 5.73-percent dividend yield. El Paso Corporation (NYSE: EP) was up a whopping 85 percent. The main reason it jumped was that it agreed to be acquired by Kinder Morgan, creating one of the largest pipeline networks in the United States.
A Brief Forecast for 2012
With emerging market economies booming all over the world, it’s no secret that silver, fertilizers, coal and oil are in increasingly short supply, and will remain so throughout 2012. I expect prices to continue to go up, not down. It’s just simple supply and demand at work.
As you can see from my short summary, we got our main premise right: Commodities were headed north, and will continue to do so this year.
Now, given the bear market mentality the market seems stuck in, you can buy the companies that are producing them at screaming bargains.
We’ll revisit this next year and see how we did. In the meantime, have a great holiday season, and get ready for another wild ride next year in energy and commodities.
Good investing,
David Fessler
Article by Investment U
