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This Contrarian Indicator Means Good News for Oil and Gas Stocks.

This Contrarian Indicator Means Good News for Oil and Gas Stocks

There’s a revolution coming.

In fact, it’s already here.

It’s an energy revolution. Of a kind perhaps not seen since wildcatters successfully drilled for oil at Spindletop, Texas in January 1901.

And as usual, just when the mainstream should be buying into this revolution, they’re doing the opposite, they’re selling.

What on earth are they thinking…?

For some time we’ve written about one of the greatest energy turnaround stories of all time.

If you go back just 20 years, all the talk in the US was of a looming energy crisis. The US was at the mercy of the OPEC oil cartel.

It was consuming way more oil than it produced.

And of course back then the thought of an oil crisis was that it would come if the crude oil price hit US$40 a barrel. So if oil hit US$100 a barrel that would be an unmitigated disaster, right?

Wrong. Oil at US$100 and above has proven to be the single most important factor in making sure the US avoided an oil crisis.

The building blocks of the free market
 

It was a simple case of supply, demand and price — the three fundamental blocks of the free market.

When prices rise, entrepreneurs and investors recognise the opportunity to make money from those higher prices. That means they tend to focus their resources and capital in these high priced areas.

In other words, high prices attract investment.

But high prices have another impact, especially in the case of the resources sector.

High prices can mean that previously uneconomical resources become economical. That’s exactly what has happened with the oil and gas industry as explorers and producers look to exploit the US’ vast reserves of shale oil and gas.

It has meant that now, as Bloomberg News reports:

The U.S. overtook Russia and Saudi Arabia as the largest combined producer of oil and gas last year…

The shale energy boom isn’t without controversy. The hydraulic fracturing (fracking) technique has been blamed for minor earth tremors in areas near where oil firms are fracking.

And there are also worries that the chemicals used in fracking may seep through to the water table, potentially contaminating water supplies.

But so far none of this is proven. And for as long as there isn’t any proven adverse impact from fracking, the drilling will continue, and the US will edge ever closer to energy self-sufficiency.

They’re selling, we’re buying
 

It’s fair to say that the shale energy boom has given fossil fuels a whole new lease on life.

For all the billions spent on green energy and nuclear power, it’s a fact that oil, gas and coalare still the number one energy sources. And odds are it will stay that way until other energy sources can achieve the same level of efficiency as fossil fuels.

To our mind that makes the fossil fuel energy sector a great source of investment opportunities.

But not everyone sees it that way. As the New York Times reports:

Stanford University announced Tuesday that it would divest its $18.7 billion endowment of stock in coal-mining companies, becoming the first major university to lend support to a nationwide campaign to purge endowments and pension funds of fossil fuel investments.

It’s a cute move. The university endowments are clearly responding to the pressure group activity of young students who have assumed the moral authority when it comes to investing.

But it’s also likely to be a big mistake. Scratch that, a huge mistake.

We remember similar outcries during the 1990s and 2000s. Only back then the moralising was against tobacco companies. University endowments took the same steps. As the New York Times reported in 1990:

Harvard University and the City University of New York have decided to eliminate stocks of tobacco companies from their investment portfolios, in what may be harbingers of a new tactic to highlight the dangers of smoking.

Again, a cute move.

But in terms of an investing decision it was a terrible move…

A great contrarian indicator
 

Since then tobacco firms have been among the best performing stocks on the market.

Between 1999 and today British American Tobacco [LON:BATS] is up 533%.

Reynolds American Inc [NYSE:RAI] is up 596%.

Lorillard Inc [NYSE:LO] is up 509%.

And Imperial Tobacco Group [LON:IMT] has gained 375%.

That’s compared to the benchmark US S&P 500 index, which has only gained 52.6% since 1999.

Call it a contrarian indicator if you like. But if the experience of the tobacco companies is anything to go by, the decision of big endowments to begin selling their fossil fuel stocks could prove to be the beginning of an almighty surge in the stock prices of oil, gas and coal companies.

Cheers,
Kris Sayce.+

This article is contributed by Money Morning. Click Here to Subscribe to their free newsletter.