The oil price rally and alternative energy investments

James Woodburn - Mon 24 Apr, 2006

...Oil prices on the New York Mercantile Exchange topped $71 a barrel; the latest in a series of records no doubt sparked by world-wide jitters over Iran's nuclear programme and falling gasoline supplies ahead of the summer. According to the Wall Street Journal, analysts are split over exactly what has fuelled the recent oil price rally...All across the alternative energy industry this week, share prices are soaring...meaning investment in this area could be a positive move...

The oil price rally and alternative energy investments

It's not looking good...

Oil prices are raging, gas prices are following suit, and Iran is more than a little grouchy.

With oil once again over $70, we're in for a pricey summer.

And if things go south in Iran, hold on to your hats: We could easily see triple-digit oil prices...

Oil prices on the New York Mercantile Exchange topped $71 a barrel; the latest in a series of records no doubt sparked by world-wide jitters over Iran's nuclear programme and falling gasoline supplies ahead of the summer.

The oil price rally and alternative energy investments: Reasons for the rally

According to the Wall Street Journal, analysts are split over exactly what has fuelled the recent oil price rally.

While some cited anxiety over a possible disruption in Iranian supplies as the driving force, others pointed to a surge in gasoline prices.

"I think too much emphasis is placed on Iran, Nigeria and Chinese demand and not enough on gasoline," said Jim Ritterbusch, president of Ritterbusch & Co. "You really have to look at gasoline crack spreads to see what is really leading the market."

(By the way, a 'crack spread' is the difference between what the company pays and the price at which it sells the product on the market.)

The oil price rally and alternative energy investments: Crude

In New York, crude jumped as high as $71.60 before settling at $71.35 a barrel, the highest level for a front-month contract since crude futures began trading on the Nymex in 1983.

Crude futures for delivery beyond May were much higher, reflecting further market worries about a possible disruption later in the year.

Gasoline climbed to $2.2239 a gallon, again the highest for a front-month contract since the aftermath of Hurricane Katrina last summer.

And this side of the pond the black stuff made a new contract high today hitting $70.98 midday.

The oil price rally and alternative energy investments: "Three fundamental forces..."

The WSJ reported: "The rally in oil prices has been driven by at least three fundamental forces: real production problems in major producing countries such as Nigeria and Norway; anxiety about the Iran nuclear row; and concern about shrinking supplies of gasoline ahead of the peak summer driving season.

"Gasoline inventories have fallen nearly 18 million barrels over the past six weeks as refiners have reduced operations to conduct seasonal maintenance.

"Some market analysts blame the Iran nuclear dispute for adding as much as $10 a barrel to oil prices since the start of the year. Others, however, played down the likelihood of an Iran supply disruption this year and said speculators have used the Iran story as an excuse to bid up futures."

It may well be an excuse but when we're witnessing massive spikes in the oil price on a tiny bit of news, it's a sure sign that the markets are on-edge.

The oil price rally and alternative energy investments: "They want change and they want it now..."

And I think it's why the guys in my office are a getting a bit peeved with me this week...

Every time I check in on the markets, my jaw drops and my leg shakes with excitement. All the right stocks are doing all the right things.
 
It is a scene no different than a lazy dog getting his belly rubbed, except my excitement is a bit annoying in an office filled with people attentively going about their daily business.
    
The reason for my jubilation?

As oil goes crazy the alternative energy industry has caught on fire. Western citizens are finally fed up with paying extraordinary fuel prices. They want change, and they want it now.

And for investors in the alternative energy industry, this is fantastic news. There are profit opportunities literally everywhere. If the industry is going to move anywhere, it is going to take lots and lots of money.  

You see, normally when oil prices rise, the share price at the world’s refineries rise in step.

But not this time...

Companies that specialise in every other form of energy are seeing their share price surge, but not oil companies. 'Big Oil' is stuck in neutral. And I reckon it's a sign of things to come.

The oil price rally and alternative energy investments: Share prices soaring

All across the alternative energy industry this week, share prices are soaring meaning investment in this area could be a positive move...

Solar energy companies are seeing big gains. Uranium miners are doing quite well. Wind power generators are getting plenty of action. And coal, surprisingly enough, is getting more attention than ever...

Andrew Snyder, a former financial adviser and colleague of mine in the States is the editor and brain trust of Breakaway Investor. He's very bullish on alternative investment picks. His one goal is to identify companies that are about to "break away" and become leaders in their industries or sectors...

In a note to me today he said that "as America looks to lose its dependency on foreign oil, alternative energy companies are the ones that will make the big money.

"But to ensure sizeable long-term profits you have to invest methodically and logically. You have to invest in the companies with the best chance of success, no matter how large or small.
   
"Some large companies like the big uranium mining companies and ethanol producers will see significant share price appreciation. And plenty of tiny companies that, for example manufacture bio-diesel, will hand investors huge profits."
   
"When looking for investments in this (alternative energy) industry, there are two key things to look for; a differentiating product and competition.

The oil price rally and alternative energy investments: A differentiating product

"Especially in the alternative energy industry, it's vital you make sure a company has a product that the market is yearning for and that it is not just some high-tech pipe dream.  
 
"As interesting as flying cars may sound, the demand is far from high. And especially in the alternative energy industry there are tonnes of products touting earth- shattering technology that will never see the light of day. 

The oil price rally and alternative energy investments: A company's competition 

"Next, look at a company’s competition. If a company has lots of tough competition and it has no way of combating the competition or its product line-up is not strong enough to overcome it, it will prove to be a lousy investment.
     
"In the alternative energy industry, wind power generators have a lot of competition. Dozens of companies are touting new and innovative technology, but there is simply not enough demand to absorb the competition. Until the competition is weeded out, no big profits will be made."  

The oil price rally and alternative energy investments: Staying away from wind power

Andrew's staying away from wind power for now and so are we. He likes technology that already exists, and people are familiar with.
    
And that's why he likes coal; it's abundant. The necessary infrastructure is in place. Plus, with new technology, it's very clean to burn.

But perhaps best of all, coal can be turned into oil for less money than we are currently paying for a barrel of Middle East crude.

On reading his note, at first I found it hard to think of coal as alternative energy, but with the latest technology, Andrew insists it is.
    
Investing in alternative energy is not hard, and rising oil prices are making it easier every day.  

Pick a company with little competition and a strong, innovative product and you could find yourself much richer in a very, very short amount of time.


Best regards,
 
James Woodburn
for The Daily Reckoning