BARRON'S

Browsing through Barron's this morning and the most thought provoking piece came from Ned Davis and his discussion about the energy sector:


"There are some factors that are really, really bullish for energy. Except for a global recession, I can't see what could possibly stop it. We in the U.S. use 25.8 barrels of oil per person per year on average. In China, which has a lot more people than the U.S., they use 1.8, and in India it is 0.8 barrels per person per year.

We have SUVs and they don't.

We have every energy-using vehicle going, but those countries are getting richer and are industrializing. I don't see what could possibly stop demand. If rates stay up here, U.S. demand could go flat, but I can't see how that possibly happens in China and India. OPEC [Organization of the Petroleum Exporting Countries] always produces above its quotas. Now that oil prices are at near-record highs, OPEC is producing less than its quotas. That has almost never happened, which tells me they are flat-out producing and don't have any spare capacity because they would be selling it. Prices almost have to go up. There are other issues, too. The U.S. is now producing a record low amount of its own oil supply -- only 10.5% -- and other developed countries' oil production is down, and we are getting oil from countries that are unstable and not friendly. We've got a refinery problem. We haven't built a new refinery in this country in years, and we have got hurricane season coming in July and August. That's upside pressure. I'm not even taking into account any possible terrorist acts. The pressure is on, and it would take almost a global recession to stop it.

Now that I've given you all the bullish factors, let's look at the Fidelity sector funds again. A record 28% is in four funds that are energy-related. So energy is a crowded trade, and a crowded trade doesn't mean you will lose money, but it raises the risk a great deal. Since the end of January, we have been telling people to continue to hold energy but write covered calls on their positions."

Ned is echoing my often repeated thoughts on energy, we are running out of oil and OPEC and the Saudi's can not produce as much as they want us to believe they can produce. In addition, I bet the Chinese and Indians start using more oil on a per person basis(lol). Bottom line, prices are going higher and probably higher than one would think.