Be Careful with Energy Share Purchases

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Certainly everyone has noticed the spiking crude oil price the last 2 days. We would contend that oil is spiking for the same reason that stocks are moving violently–traders riding the wave and pushing prices to extremes. This isn’t a game that individual investors should even be contemplating getting into–if you are a speculator fine–if you fancy yourself a income investor don’t even be tempted to get into a game you will likely lose.

It was announced that daily crude oil production in the U.S. has fallen by 3% since April–this is a long way from bringing inventories into balance.  Last week we had 1.145 billion barrels of crude in inventory– which is 9 million barrels under the week before–this is less than a 1% fall in inventories–hardly a reason to send prices higher by 15% in 2 trading days, in particular in light of the fact that the heavy refining season is coming to a close and demand is likely to drop from this point forward.

We note that the preferred shares of energy MLP’s and other energy related preferreds didn’t move much today–obviously someone realizes that it will take a lot more than 2 strong days and $6/barrel to rescue these companies. On the other hand it does give ‘hope’ to various parties (in particular lenders) as they struggle to keep their heads above water.

As we have mentioned before we are doing our best to not make ‘foolish’ investments and we would classify the purchase of most of these preferreds by a income investor as just that—‘foolish’.  If you are, or want to be, a speculator there is probably a play here–if you are like us and would like to just earn a solid 6-7% this isn’t the place to invest.

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