Earlier this year, we perceived significant risk inside the oil market: Large speculators had made extreme bullish bets in the futures market, and there was reduced demand from emerging markets. In response, we took half of our energy stock exposure and invested it in Master Limited Partnerships (MLPs). MLPs are natural resource activity companies, mostly involved in the distribution of oil or natural gas through pipelines. This side of the energy business is not directly tied to the price of oil, as oil needs to pass through pipes regardless of price. Additionally, oil supply in our country is skyrocketing and demand for the pipes is increasing. These two factors are major reasons why we were attracted to the investment, and why we remain constructive on the future of MLPs.
Our timing was good: Starting in mid-June, crude oil entered a four month period in which the price dropped from $108 per barrel to $79 dollars per barrel. Gasoline prices in the U.S. have also fallen about 18% from $3.70 to $3 per gallon, which equates to about $84 billion in freed spending power (assuming every $.10 drop in gasoline prices leads to $12 billion in freed spending power for consumers). This economic stimulus is welcomed by everyone… except energy investors, whose stocks fell over 20%.
Because of our shift to MLPs, the energy section of our portfolio experienced significant outperformance, as the MLP fund only fell 7% during the same period.
[Energy stocks comprise 9.8% of the S&P 500, which means that a Pinnacle DMG client is benchmarked to 4.3% U.S. energy stocks (44% of the DMG benchmark is the S&P 500).]