Breakout

Energy sector still looks cheap: Blackrock’s Koesterich

Jeff Macke
Breakout

With ISIS threatening to blast its way into southern Iraq as U.S. Secretary of State John Kerry arrives on the scene, it’s not surprising to see crude oil prices moving higher. In recent weeks the U.S. benchmark for crude, West Texas Intermediate, has shot over $105 and Brent has hit $115. Both are well over prior 2014 highs and close to taking out 2013 peaks.

With the constant threat of inflation perhaps finally becoming reality Russ Koesterich of Blackrock thinks now is not the time to get complacent about risk, even if the events in Iraq are still largely contained in the north. In light of the violence, Koesterich wonders “are you really going to put marginal money to work in Iraq to invest in the energy sector? If you don’t that surge in production that many analysts were expecting in Iraq may not happen. Given that North American production is likely to level off what that suggests to us is that oil prices are likely to stay elevated for quite some time. That’s good for energy companies.”

There’s a big difference between the implications of another leg higher in crude oil and what happens if prices stay where they are. As Koesterich points out, there’s still a technical case to be made for these prices being roughly in a range. With gas prices still not having moved substantially higher a pullback here may help consumers avoid the worst of the pain this driving season.

Buy energy, sell consumer discretionary

Koesterich is playing this move by the book. Energy prices moving higher makes that a sector to consider for investors looking for relatively decent values in a bull market that’s showing its age. His source of investing funds is going to come out of the consumer discretionary stocks that have been getting a decent bid for the last month.

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