HardAssetsInvestor

Written by Lara Crigger  |

March 05, 2010

Evan Smith: Oil And Gas On The Rise In 2010

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The co-manager of U.S. Global Investors' Global Resources Fund shares his outlook for energy in the months ahead.

• Are oil prices tied to the Chinese New Year?
• Why do rising U.S. imports mean a drop in crude prices?
• Why shale gas is a game-changer

 

Spring is in the air, and it's that time again: March Madness. No, not the basketball tourney—we mean the historical rise in crude oil and natural gas prices, which increase an average of 4 percent and 7 percent, respectively, according to recent research from natural resources and emerging markets mutual fund company U.S. Global Investors. And this March looks like it will continue the pattern, says Evan Smith, co-manager of the company's Global Resources Fund (PSPFX).

Smith has over a decade of experience in the energy industry. Before joining U.S. Global Investors in 2004, he was a trader with Houston-based Koch Capital Markets and an equities research analyst for Sanders Morris Harris, where he followed oil, gas, coal and pipeline companies.

HAI Associate Editor Lara Crigger recently sat down with Smith to get his take on the 2010 outlook for oil and gas, including what influence new seasonal trends from China have had, why rising U.S. crude imports usually lead to a drop in prices, and why shale natural gas could change everything.

Lara Crigger, associate editor, HardAssetsInvestor.com (Crigger): In March, crude oil prices have historically risen an average of 4 percent. So why is this month such a great time for energy prices?

Evan Smith, co-manager, U.S. Global Investors' Global Resources Fund (Smith): I think some of that has to do with us coming out of winter and looking at summer driving expectations. Usually by the end of February, as winter wraps up, inventories have been drawn down. So you get optimism about growth for the economy, regarding the summer driving season. With inventories drawn down and seasonal demand right around the corner, I think that generally that's what has contributed to that empirical finding.

We've also started to see seasonal price improvement in the price of oil over the past decade that specifically coincides with the start and ending of Chinese New Year (which tends to be in late January or sometime in February). As the Chinese come back from an extended holiday period, you tend to see economic activity ramp back up, which includes additional demand for energy and crude buying, etc. It might just be an interesting coincidence, but it could also be a good explanation of that March price increase.

Crigger: Interesting. Do you think that, in 5 to 10 years, we'll talk about the Chinese New Year being as important a seasonal driver as the U.S. driving season?

Smith: We could be. We know that the U.S. is the largest market for energy for crude oil, in terms of absolute size. But there's really no growth there. Actually, in all the OECD countries, there's really no growth in oil demand. All the oil demand is coming from emerging markets—and the bulk of that is coming from China. China accounts for about one-third of global oil demand growth.

So as that market continues to grow, perhaps seasonal factors like weeklong holidays and the optimism that comes out of them will become more of an august explanation for the seasonality of the price of oil.

Crigger: It sounds to me like 2010 will be another "year of the emerging market," at least when it comes to energy demand.

Smith: Yes, I think that's going to be a key driver. Of course, 2009 was somewhat of an anomaly, because demand for everything was down due to the late-2008 credit collapse and financial shock. It brought global trade to a halt, and exacerbated those recessions that had already started, turning it into the Great Recession. The picture definitely looks better than it did a year ago, as far as stability in global trade and commerce, and leading economic indicators have improved drastically. We're seeing production growth recovering substantially, not only in emerging markets but also in OECD countries as well. There are still some head winds, and there's always the chance of a double-dip, but it does look like things are going to continue to get better, not worse.

So we see economic recovery as one of the key drivers for oil, and it looks like things are on the right track, particularly in the emerging markets. That's where most of the incremental growth is. As global GDP continues to improve, we think they'll be a key driver for oil demand—and therefore oil prices—through this year and into 2011.