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Bush’s Comments Bring No Major Shift For Energy Funds January 24, 2007

Posted by notapundit in Economic News, US News, White House.
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NEW YORK (Dow Jones)–President George W. Bush’s State of the Union speech didn’t bring strong winds of change for energy and natural resources funds, but his comments could help put a floor on oil prices and further boost sentiment for alternative-energy sources.

Bush’s proposal to double the capacity of the federal government’s Strategic Petroleum Reserve by 2007 will mean a reasonably significant near-term change in U.S. demand, said David Reilly, director of portfolio strategy for mutual-fund group Rydex Investments in Rockville, Md.

“It helps put a little bit of a floor on energy prices, which have come down so dramatically over the last few months,” he said.

Indeed, oil prices surged Tuesday, partly on the news. On Wednesday, they dropped after news that U.S. inventories of crude, gasoline and distillates rose last week, but prices then rebounded later in the day.

The president’s call to encourage the production of renewable and alternative fuels, such as ethanol and biodiesel, “is a little bit more nebulous,” Reilly said. While the president was trying to foster research and innovation, Reilly said he doesn’t expect that to have “a terribly significant impact on stock prices in the energy sector in the near term.”

David Schoenwald, co-manager of the New Alternatives Fund, which seeks investments in companies that “have a positive impact on the environment,” said the sentiment for alternative fuels – particularly ethanol, most of which is derived from corn – is positive, but he is “a little bit worried about the reduced oil prices.”

“The problem with ethanol seems to be, we have had lower oil prices and higher corn prices,” he said, “and that, I would expect, would reduce the margin on ethanol-making. So I don’t know where that’s going to go.”

And while sentiment is good, he said, the particulars are still unknown. “Everything has to get implemented,” he said.

Stocks Are Pricey, But Money Is Coming In

At any rate, Schoenwald said, ethanol “is not something we invest too much in.” As of Dec. 31, the fund had investments in Spanish company Abengoa SA (ABG.MC), which has a biofuel business, and ethanol producer Verasun Energy Corp. (VSE).

Some “of our stocks are a little bit pricey,” said Schoenwald. He said he is selling a little, but “at the same time, we’re getting a lot of money in here relative to the past, so I’m going to have to figure out what to do with it.”

Lawrence Jones, an analyst with Chicago fund tracker Morningstar Inc., said the recent decline in oil prices has affected natural-resources and energy funds more than any proposed legislation or longer-term views on alternative energy.

“A number of energy funds have seen some modest losses due to this,” he said.

While it is conceivable that the call for a doubling of the Strategic Petroleum Reserve would help prices, it’s difficult to know, said Jones.

“I think it’s more likely to be determined by broad-range supply-and-demand dynamics,” he said. “We’ve seen relatively stable support from OPEC nations, and we’ve also not really seen any kind of political risk over the past six months or so that have sent oil prices back up.”

For instance, in 2005, Hurricane Katrina caused a dramatic spike in oil prices, he noted.

A move toward alternative energy would have an impact on long-term oil prices, but “we’re still a long way from replacing oil or natural gas as a primary source of energy,” Jones said.

While speeches can be dramatic in terms of goals and deadlines, “what actually happens three, five or 10 years down the road” can be a totally different story, he said. “I think you would probably have to see really significant changes in policy in place before you saw any real significant long-term change in the direction of prices and, consequently, on energy stocks and funds.”

By Daisy Maxey, Dow Jones Newswires

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