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Jubak's Journal Recent articles: • 5 keys to beating the market, 1/3/2006 • The dark side of the dividend boom, 12/27/2005 • 5 stocks smart insiders are buying, 12/21/2005 More... | Jubak's Journal Russian roulette? Not with these 5 stocks When Russia interrupted gas supplies to Europe, oil prices jumped. Supply worries are here to stay, and these are the companies that will benefit. By Jim Jubak Here we go again. Remember how supply disruptions -- and the fear of supply disruptions -- drove energy prices through the roof in 2005? Well, 2006 has started off the same way, with oil prices climbing more than $1.50 a barrel, or 2.5%, to $62.50 on Tuesday. But it is slightly different this time. The fear this time is global politics rather than tropical storms. And the commodity facing the most danger of a supply shortfall is natural gas rather than crude oil. Those two differences for 2006 from 2005 change the way that investors should play the latest round of energy fears. Tuesday's spike in energy prices (and in the prices of safe-haven assets such as gold and gold stocks) was a result of the tiff between Russia and Ukraine over gas supplies turning into a bare-knuckle brawl. Russia -- which hasn't been thrilled with Ukraine since voters there replaced a pro-Russian regime with pro-West President Viktor Yushchenko in 2004 -- cut the amount of gas it exports through a Ukrainian pipeline on Jan. 1. (Gas flows, mostly, were back to normal by Jan. 3.)
That created immediate shortages in Ukraine, which gets about 30% of its gas from Russia, and in Western Europe, which gets 25% of its gas from Russia. Supplies of Russian gas to Italy and France fell by 25% and 30%, respectively. The end of Soviet-style subsidies Two things explain the Russian move. First, Russia is flexing the political muscle that comes with being the owner of the world's largest natural gas reserves. Russia, which has supplied gas to Ukraine and other former Soviet states at below market rates since the breakup of the Soviet Union, sees less and less reason to subsidize states that have failed to toe the Russian line on foreign policy. That's why Russia is now charging the Baltic states of Estonia, Latvia, and Lithuania -- former Soviet republics but new members of the European Union -- $120 per 1,000 cubic meters for natural gas (with the price set to go to market levels in two years) while reliably pro-Russian Belarus pays just $46 per 1,000 cubic meters. Second, Russia wants more control over the systems that transport its gas to international customers. The Russians put the screws to Ukraine, demanding that the country pay $230 per 1,000 cubic meters of natural gas, as a bargaining chip to gain control of the pipeline that runs across Ukraine from Russia to Russia's European customers. In return for its cheaper gas, for example, Belarus shares control of its gas pipeline with Russia. The Russians have apparently offered Ukraine a deal that would create a transition period to higher gas prices in exchange for the formation of a joint venture to operate the trans-Ukrainian pipeline. More from MSN Money
The Russian supply cut-off badly rattled European governments and financial markets because Russia's oil and gas is so critical to European consumers. The International Energy Agency estimates that by 2010 Europe as a whole will supply only about a third of the natural gas it consumes. What's worse, as far as the markets are concerned, is that the supply cut-off may mean that Russia, long considered the most reliable supplier of natural gas to Europe, may not be so reliable after all. If Russia is willing to cut off gas supplies to pressure the Ukrainians into a pipeline joint venture, why wouldn't they be willing to cut off supplies again in the future? And it's not like the world's other natural gas powers are models of reliability either. After all, Iran ranks just after Russia with the second largest natural gas reserves in the world. Tiny Qatar is No. 3. (Now doesn't that make you feel better?) When gas supplies are short, go long oil So what does this mean for investors? In the short-run anything that suggests that the supply of natural gas to Europe from Russia may be unreliable will push up the price of natural gas (somewhat), coal (a good amount), and oil (a lot). Because it is so difficult to get gas from new sources into Europe -- it requires building new pipelines across politically unstable regions or the construction of difficult-to-site liquefied natural gas terminals -- the short-term solution is to substitute other fuels such as coal and oil for gas. Coal is relatively cheap, but also relatively dirty, so oil is the substitute fuel of choice. So of natural gas, coal, and oil, oil would experience the most price pressure in the event of another bout of jitters over supplies from Russia. In the short-run, natural-gas supply worries will increase efforts to find gas in politically stable areas. Expect more drilling in the United States, Canada, and any other country where government policy favors production. A move like Russia's raises global fears of supply disruption and increases drilling activity even in areas far removed from the specific danger. In the longer-run, I'd expect Europe to push to develop alternative energy sources -- nuclear or wind or solar. My Friday, Jan. 6 column will take a look at some of the winners from that long-term trend. But today, I'm sticking to the short-term, six months or so. Here are five stocks likely to benefit in coming months from worries about natural-gas supplies. Occidental Petroleum Apache Peabody Energy Although U.S.-based natural gas stocks aren't likely to get as much of a bounce from fears of a European supply disruption as, say, oil stocks, they will get a push as supply worries anywhere in the world put a floor -- and a rising floor at that -- under natural gas prices. With North American exploration and production going through a revival, I think investors should have some exposure to U.S. producers. My two top picks in this sector are: EOG Resources Chesapeake Energy Editor's Note: A new Jubaks Journal is posted every Tuesday, Wednesday and Friday. Please note that Jubak's Picks recommendations are for a 12-to-18 month time horizon. See Jubak's CNBC Picks for shorter six month recommendations. For suggestions to help navigate the treacherous interest-rate environment see Jim's new portfolio Dividend stocks for income investors. For picks with a truly long-term perspective see Jubak's 50 best stocks in the world or Future Fantastic 50 Portfolio. E-mail Jim Jubak at jjmail@microsoft.com. At the time of publication, Jim Jubak owned or controlled shares in the following equities mentioned in this column: Chesapeake Energy. He doesn't own short positions in any stock mentioned in this column. | |||||||||||||||||||||||||||||
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