This is an oil/energy update. 

We wrote about oil in early September: http://www.cumber.com/commentary.aspx?file=092506.asp&n=l_mc .  Our view was and still is that the energy price is going higher and that our over weight ETF investment position should continue in this energy sector.    

We also recently criticized the ethanol mess and offered how it didn’t help the energy price but did help raise it and also create shortages in grains.  Some folks in this world are going to starve because of it.  See: http://www.cumber.com/commentary.aspx?file=111806.asp&n=l_mc .  

Now we will add these additional points in favor of higher oil prices and continued over weight in the energy stocks:

The dollar has declined about 10% (trade weighted) from where it was a year ago.   Oil is about the same price per barrel as it was a year ago.  Oil is priced in dollars.  Therefore, we in the US have had a price run up to near $80 and back to $60.  The rest of the world has had a smaller price run up and is now looking at an oil price 10% lower than it was a year ago.  

1. The relative price is important because it allows us to estimate the stimulus that occurs from the oil price change in various parts of the globe.   In the rest of the world that stimulus has spurred demand.  Oil consumption is about 1½ million barrels a day (mbd) higher than it was about a year ago.   In the US the change has been nearly flat.  Our oil consumption is not the growth area.  Look to Asia to find it.
2. Oil futures prices suggest a return to nearly the $70 level in 18 to 20 months.   McKinsey & Co. forecast continuing rise in world oil demand at about 2.2% a year until 2020.  We agree.   Oil could easily be $100 before then as world consumption rises between 1½ and 2 mbd each and every year.
3. The unrest in Nigeria continues and may be worsening.  Press reports usually do not include this in the top of the list.  They should.  Nigeria is becoming an increasingly dangerous place for the folks who work in the oil industry. Investors need to keep an eye on this geography.
4. Speaking of geography, the Middle East is deteriorating and the market has ignored it.   In Iran, we see Russia supplying missile defense material to protect Iranian nuclear sites.  We see the breakdown in Lebanon and the Syria-Hezbollah connection strengthen.  The Israel-Hamas battle continues unabated.  Clearly we see a murderously intense civil war in Iraq.   Soon we will witness the forthcoming pullout of the British.  What will that mean?  They are in the Basra region; that is where a lot of Iraqi oil exports originate.  Basra is Shiite and close to Iran which is also Shiite.  Instability in Basra is almost certain to rise when the Brits depart.  Right now Iraq still exports about 1.6 mbd.  As much as half of it is at risk if the civil war spreads and intensifies in Basra.   Also, only about 1600 of the 2300 oil wells in Iraq are working.  The civil war prevents regular maintenance and precludes development.  So every time a well loses functionality it goes offline.  We expect that to continue and intensify.

All this leads to a strange alignment.  In Iran, the Shiite center of power, there is an interest in the higher oil price.  Iran has no love for the west and would spend the money on the mischief it spreads in the region and on domestic social spending so as to endear the Ahmadinejad regime to the populace.   In Sunni Saudi Arabia, they wish to maintain the present oil price or see it a little higher.  They do not want to kill the west but they would welcome the higher oil price if the source of the pressure was from other than OPEC cartel price maintenance.   So we have both the Sunni power and Shiite power supporting their respective allies who are the combatants on one side of the Persian Gulf while enjoying the benefits of any higher oil price and attendant risk premium.   This bodes ill for Basra and any other place where the civil war might spread.

Cumberland continues to maintain an over weight position in energy.  We use the Vanguard energy ETF as our first choice.  The symbol is VDE.  It contains 118 stocks in a diversified energy assemblage.  The heaviest weights are ExxonMobil (XOM) Chevron (CVX) and ConocoPhillips (COP) Schlumberger (SLB) and Occidental Petroleum (OXY).