Global warming heats oil and coal sectors
Commentary: Why melting Arctic ice will boost energy demand
By Jon Markman, MarketWatch
SEATTLE (MarketWatch) — Crude oil is pushing past $89-per-barrel, right around the resistance level it’s encountered several times this year. Expect resistance to hold again, as there are powerful forces in the Middle East and elsewhere that do not want to allow prices to rise to the level at which demand will be destroyed, as it was in mid-2008.
However if crude oil prices do push through here, there is virtually no resistance until $100. And a move of that magnitude would electrify energy shares enough to super-charge the next phase of the recovery. The banks might be too messed up to lead in 2011, but there’s no reason Exxon Mobil Corp. (XOM 71.19, -0.29, -0.41%) or Chevron Corp. (CVX 84.89, +0.39, +0.46%) cannot regain their stature as kingmakers.
Crude and natural gas are the only major commodities that are not trading near multiyear highs, and that is because of the concerns that economic growth in developed countries does not support a build-up of inventories.
If this view of the demand/supply balance changes, and sellers step aside, the $100 level last seen for crude oil in October 2008 amid the credit crisis will act as a magnet. And a rapid upward repricing of all stocks in the energy complex will follow.
To get a better feel for whether this might occur, keep an eye on the weather reports.
Europe is undergoing a massive freeze now, with unprecedented drifts of snow for early December. Dozens of major airports on the Continent have closed, roads are blocked and Eurostar international rail service has been canceled. The unseasonable cold snap has been thought until now to be a fluke, but weather is returning toward 100-year medians that are a lot cooler than people and governments are prepared for. This extreme weather could last awhile, amplifying the demand for coal and natural gas to heat homes and offices.
I am not a climate expert, so all of you true weather experts need to give me a break here. I’m just going to paint the picture of what’s happening as I understand it as a layman.
I gather that one of the effects of global warming has been to release a lot of ice in the Arctic into the northern seas. This is fresh water, so it is diluting the Atlantic Ocean’s natural salinity by just enough to matter. Since fresher water freezes at a higher temperature than saltier water, the Atlantic coast of Europe has become much colder than normal — in some cases by as much as 10 degrees. When the wind blows across this colder water, it carries this icier weather onto land.
At the same time, for a variety of reasons that scientists do not completely understand, the gulf stream is not bringing as much warm water up from the tropics and is also not blocking the colder Arctic water from circulating south — compounding these other factors. So the net effect is a continent that is on track to become unusually cold at a time when oil and gas prices are around the same level as they were in balmier times, despite the need for much more fuel to light furnaces than expected.
The importance of these changes can be recognized more readily by looking closely at a map of the countries on either side of the Atlantic. Put your finger on chilly Halifax, Nova Scotia, and then drag it straight to the right on the 44th parallel to sunny Nice, France.
A key difference in the weather between these two cities at the same latitude is the protection that the gulf stream provides to the east. Take it away, and Nice would not be so nice.
This chilling of Europe thus has nothing to do with sovereign debt and everything to do with climate change — mostly natural, some man-made. It’s certainly a paradox that global warming is leading to European cooling, but here’s the rest of the argument, in brief:
Record high temperatures in the Arctic have warmed the permafrost, melted the snow and caused sea ice to rapidly diminish in just the past five years. The remaining ice is also thinner, which makes it melt faster every year, exposing more of it to the relative warmth of the ocean below. That leads to more melting, making it hard for sea ice to recover to levels of a few decades ago.
Some scientists believe warmer air rising off the Arctic is also interfering with the polar winds that usually keep cold air circulating around the polar ice cap. This disturbance has permitted cold air to push south to northern Europe and Canada.
That’s enough seventh-grade science. The bottom line is that colder weather can trump the slowness of the recovery in providing a boost for energy prices.
Key positions to own will be exchange-traded funds SPDR Oil& Gas Equipment & Services (XES 36.29, +0.34, +0.95%) , SPDR Oil & Gas Exploration & Production (XOP 50.67, +0.22, +0.44%) , Market Vectors Coal (KOL 45.00, +0.17, +0.38%) and Market Vectors Nuclear Energy (NLR 25.81, +0.20, +0.78%) . Top stocks will include ConocoPhillips (COP 63.92, +0.22, +0.35%) , Apache Corp. (APA 115.11, +0.73, +0.64%) , Schlumberger Ltd. (SLB 82.74, +2.00, +2.48%) , Total SA (TOT 51.34, +0.96, +1.91%) and Petrobras (PBR 34.39, +0.61, +1.81%) .
Meanwhile, refiners such as Tesoro Corp. (TSO 17.39, +0.11, +0.64%) , Valero Energy Corp. (VLO 21.08, +0.35, +1.69%) and Western Refining Inc. (WNR 9.82, +0.11, +1.13%) are the most cheaply valued and carry the most upside.
Jon Markman is a MarketWatch columnist. He runs a money-management and investment-advisory firm in Seattle.
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