Investing Daily’s annual Wealth Summit was held May 12-13 in Las Vegas. This was my fourth Wealth Summit, and the first one that was also livestreamed to subscribers who tuned in. I had mixed feelings about having the summit there, as I think of Las Vegas as a place to gamble and lose money in games where the odds are against you. I may lose money investing, but I never consider it gambling. I am taking calculated risks, and based on the long-term performance of the markets the odds are actually in my favor — even though I may lose money in the short term.

As I have done in previous years, I want to share a compact version of my presentation. The title of my joint talk with Igor Greenwald was Momentum Swing In Energy. During my talk, I touched on the major themes in the sector, including the reasons that oil prices dropped below $30/bbl, and how long the bear market might last. I also discussed the natural gas market — which I believe currently presents a huge opportunity — and then pitched it over to Igor to discuss specific investment ideas. We each closed with our “special pick” for the summit. I am not supposed to disclose that here, but read on for a strong hint.

To summarize my views on oil prices, they plummeted for two reasons. The first was the massive increase in shale oil production in the U.S. over the past decade. It is sort of the inverse of why oil prices initially rose to $100/bbl from 2005 to 2008. That spike was driven primarily by very strong demand growth in China and other developing countries, which quickly exhausted  the world’s excess oil production capacity.

But from 2008 to 2014, the U.S. increased oil production much faster than expected. I presented a slide that showed just how rapidly domestic oil output grew.

The U.S. has long been a major oil producer, but our production has been in a long, slow decline for 40 years. Thus, the U.S. was about the last place the world expected to emerge as a major source of new supply. To put this in perspective, I showed how the surge in U.S. production compared to the gains in other major oil-producing regions of the world over the past decade:

So the shale boom was the primary culprit behind the current market glut. OPEC responded by ramping up production as well (by some 1.7 million barrels per day from mid-2014 to mid-2015), and this combination of additional U.S. and Mideast supply crashed the price of oil. This can be seen from a snapshot of global inventories:

Now growth in global inventories is slowing, and they’re expected to start declining by next year  at the latest. The reason is that, despite what you might hear to the contrary, demand for oil hasn’t slowed (as can be seen in the previous slide). In fact, over the past 30 years it has grown by about 1 million bpd each year on average. Demand growth was even stronger than that last year and is once more forecast to be stronger than that this year:

Note that 2015 demand growth — estimated by the International Energy Agency at 1.8 million bpd — isn’t shown on this graph. Nor is projected 2016 demand growth.

So, the summary on oil is that the factors that led to the crash are starting to diminish as U.S. production declines and global demand growth continues. Nevertheless, it’s going to take some time to work off those inventories, and crude oil prices have already rallied in anticipation of a trend change.

Natural gas looks like a better value for investors:

I have covered the natural gas market dynamics here a lot in recent months, and I reviewed those in a couple of slides. But the key point I wanted to emphasize in my presentation was this one:

Since 1999, each time the price of natural gas dropped below $2.50/MMBtu, it proceeded to more than double within two years. The only exception to this rule was 1997, when it took until 2000 for prices to double. The same market dynamics that caused prices to double in the past are evident today, and the price is currently below that $2.50 mark. So we have looked for values in the natural gas sector.

In presenting my special pick. I noted that I am a long-term investor trying to identify trends that will play out over years. I emphasized that investors must understand their own time horizons and risk tolerances, and act accordingly.

With that in mind, I identified the solar sector as particularly attractive. I included a slide that showed solar’s explosive growth over the last decade:

In researching my summit pick, I ran about 30 different stock screens. Some I created and some were created independently as predefined stock search strategies for different investment styles and needs. I made a list of the energy stocks that popped up on at least three of my screens:  

Notice a pattern? Of the eight companies that made three or more appearances, five are from the solar sector. In fact, we have since added Solaredge Technologies NASDAQ: SEDG) to our portfolios, but it wasn’t my special pick. Let’s just say that I like diversification, and I like the solar sector. There are only a couple of places you can get that. One of them was my special pick.

In conclusion, the tone of this conference was upbeat for energy investors, as the general sentiment is that we are leaving the bear market behind. Risks still abound, but the upside at this point looks to be worth it. Investors have started to see positive returns in recent months. My prediction this year of a 15% gain for the Energy Select Sector SPDR ETF (NYSE: XLE) in 2016 — which was deeply underwater in early February — is now on the cusp of being realized.

I am already looking forward to next year’s conference, tentatively scheduled for April on the East Coast. More details will follow, but I do hope you will use some of your earnings in the energy sector this year to make the trip.    

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