Is Now the Time to Buy Energy Stocks?

Supply and demand is everything in the energy business. And when Saudi Arabia, Russia and Iran agree to a freeze in crude oil production oil prices go up and so do energy stocks. Reuters reports that energy stocks gain from an oil price rally.

Wall Street was on track for a third straight day of gains on Wednesday after a surge in oil prices fired up energy stocks. The S&P energy sector jumped 3.24 percent, leading the nine gainers among the 10 major sectors.

Brent crude was up more than 7.5 percent after Iran voiced support for a move to freeze production by major oil producers such as Saudi Arabia and Russia. Sentiment surrounding the repercussions of the fall in crude oil and its impact on debt-laden energy companies is likely to ease with oil prices stabilizing, said John Burke, chief executive of Burke Financial Strategies in New York.

So, there is a tentative agreement by major oil producers to put a cap on oil production but not necessarily to lower production. Nevertheless oil prices went up on the news, back above $30 a barrel. USA Today reports that oil prices surge 6%.

Oil prices surged Wednesday as U.S. benchmark crude jumped more than 6% and moved back above $30 a barrel on hopes that a proposal on freezing oil production levels by major oil producers would be implemented. It would mark the first deal on production between OPEC and non-OPEC members in 15 years, according to Goldman Sachs.

So, is now the time to buy energy stocks? The first question is whether or not such a deal will come to pass and whether or not it will last. And there is a long way for oil prices to go to get back to $100 a barrel where they were in July of 2014. To get back to that point the Chinese economy would need to go back to where it was a couple of years ago which is probably not going to happen very fast if at all.

Whither China?

Australia is China’s neighbor to the south and a supplier of raw materials to the managed capitalism economy. As such they pay close attention to how things are going in China. Money Morning Australia writes about what you need to know about the Chinese economy. Getting accurate figures on the Chinese economy is difficult so one approach is to look at a trading partner, South Korea. South Korea ships a fourth of its exports to China. Imports of South Korean goods to China fell to their lowest a year ago and while they are not back up to 2014 levels they have recovered a bit. The problem however, is that China has had an economy based on exports and that needs to change to a consumer driven economy.

According to Stephen Roach, a China expert and former Asia Chairman for Morgan Stanley, the GDP figures the mainstream quote largely measure this old economy of industrial exports, factory assembly and processing.

He points to the new emergent economy, which is services and consumer led. He cites an IMF report that says domestic consumption is now contributing more to overall GDP growth in China than investment for the first time in the modern era.

Roach argues that if the IMF analysis is right, the new economy is growing more rapidly than the old economy. There’s compelling evidence that this is the case. Employment data shows strong urban jobs growth, painting a more positive picture.

The fact is that the old Chinese economy is slowing down as the new consumer driven economy is picking up. To the extent that China handles this transition effectively its energy consumption, the price of oil and energy stocks are likely to benefit. As it will all be a matter of timing be sure to do your own homework before investing.

Is Now the Time to Buy Energy Stocks? PPT

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