In late February, energy stocks started to perk up as oil easily moved past the $100 per barrel mark. Rising tensions with Iran were seen as the big factor, but an improving U.S. economy also changed the calculus for many investors. As U.S. consumers start to spend more freely, they have been expected to burn more gasoline. Emerging economies have already been consuming ever more energy, and with little spare global oil production capacity, extra demand from the United States threatened to push oil higher, as was the case in late 2007 and early 2008.
That's why I decided to add Marathon Oil (NYSE: MRO) to my $100,000 Real-Money Portfolio. That move was aimed at providing exposure to the energy sector, which showed signs of an imminent upward move.
Yet in the last six weeks, a curious trend has emerged. Whether it's because we're driving more efficient cars, or $4 gasoline is causing us to drive less, we're actually seeing a drop in gasoline consumption. And this is setting the stage for an oil glut. In the week beginning March 26, we learned that U.S. stockpiles of crude oil rose 7.1 million barrels last week to 353.4 million barrels, a seven-month high.
Adding insult, many oil producers are also natural gas producers, as the same energy field often produces both energy sources. So as drillers were poking new holes in the ground to profit from $100 oil, they have also been pulling up a lot of natural gas. As a result, natural gas prices are falling even further (with natural gas price futures dropping for the sixth straight session as I write this), and may soon breach the $2 per thousand cubic feet (MCF) level.
Right now, gas producers should be rebuilding depleted reserves after a typical winter drawdown. Instead, there is currently 58% more gas in storage than usual for this time of the year, according to the U.S. Department of Energy. At current prices, look for many drillers to offer downbeat guidance in the coming earnings season.
The fact that crude oil remains above $100 a barrel helps offset some of the pain of plunging natural gas prices.