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Saturday, August 23, 2008

Hobson's choice economically speaking...

Thesis: Expect contiuned weakness in the market, the Fed is left with a single sided choice of maintaining loose credit standards until housing regains footing. Oil continued to fall even though fundamentals remain in tact.

The single most concerning piece of information this week was the Federal Reserve’s quarterly Senior Loan Officer Survey of Bank Lending Practices. Respondents to the July survey revealed that their banks ratcheted credit conditions yet tighter in recent months, suggesting more “stag” ahead. The credit crunch has now spread into all areas of lending, with more than 80% of banks reporting a tightening in lending standards for mortgage loans, and more than 60% for consumer and business loans--levels far above those seen in the 2001 recession and even in the 1990-91 recession (graph below). Lending officers asked about their willingness to make consumer installment loans reported the biggest negative shift in attitudes towards lending to households since early 1980.

Also very disappointing were weekly data on jobless claims. New claims edged down slightly to 450,000, but remain well above levels just a few weeks ago, while the total number of claimants topped 3.4 million for the first time since 2003. With credit conditions tightening, the labor market weakening, asset prices down substantially, and fiscal stimulus now a thing of the past, households are likely to cut back on spending over the next several months. Consistent with this gloomy outlook, core retail sales in July--excluding autos, building materials, and gasoline were up only 0.3%, the third consecutive month of slowing. This suggests that the impetus from fiscal stimulus is rapidly fading.

The “flation” half of the stagflationary data came with the monthly reports on import prices and the Consumer Price Index. Import prices continued their climb in July, accelerating to a 21.7% year-over-year increase overall, 8% excluding petroleum products (the highest inflation rate since the depreciation of the dollar in the late 1980s following the Plaza Accord). For those of us who aren’t business history buffs, The Plaza Accord or Plaza Agreement was an agreement signed on September 22, 1985 at the Plaza Hotel in New York City (hence the name, I know politicians are really creative). The agreement was signed by 5 nations - France, West Germany, Japan, the United States, and the United Kingdom. The focus of the agreement was to depreciate the US dollar in relation to the Japanese yen and German Deutsche Mark (remember what was going on in West Germany right now) by intervening in currency markets. The exchange rate value of the dollar versus the yen declined 51% over the two years after this agreement took place. Most of this devaluation was due to the $10 billion spent by the participating central banks. The reason for the dollar's devaluation was twofold: to reduce the US current account deficit, which had reached 3.5% of the GDP (FYI as of 2007 it was at 5.3%), and to help the US economy to emerge from a serious recession that began in the early 1980s. The U.S. Federal Reserve System under Paul Volcker had overvalued the dollar enough to make industry in the US (particularly the automobile industry) less competitive in the global market. Devaluing the dollar made US exports cheaper to its trading partners, which in turn meant that other countries bought more American-made goods and services (sound familiar?). The Plaza Accord was successful in reducing the US trade deficit with Western European nations but largely failed to fulfill its primary objective of alleviating the trade deficit with Japan because this deficit was due to structural rather than monetary conditions. US manufactured goods became more competitive in the exports market but were still largely unable to succeed in the Japanese domestic market due to Japan's structural restrictions on imports. The recessionary effects of the strengthened yen in Japan's export-dependent economy created an incentive for the expansionary monetary policies that led to the Japanese asset price bubble of the late 1980s. But I digress….

Consumer prices leapt higher yet again, with headline inflation accelerating to 5.6% year-over-year on sharp increases in energy and food prices. Perhaps more concerning, core inflation rose 0.33% on a plethora of upside surprises strewn throughout the index, e.g. apparel +1.2% (likely related to the acceleration in import prices), tobacco +1.2%, public transportation +1.1% (probably driven by higher energy costs), lodging away from home +0.7%, education +0.5%.

The main bright spot of the US economy isn’t in the United States it’s the rest of the world, which is increasingly turning to US manufacturers given their steady productivity gains and more favorable exchange rate. In volume terms, the trade deficit has been narrowing since early 2007 (wait, this seems eerily familiar!).

Beyond the fundamental drivers of a weak dollar and weak US domestic demand, high commodity prices have been a factor behind this dramatic improvement. They encourage conservation by commodity-consuming countries like the United States (hence fewer imports) and stimulate more spending by commodity producing nations (including spending on US exports). Essentially all of the acceleration in real exports in recent months has been in commodity related goods.

Mortgage deterioration has spread beyond subprime. Early policy efforts e.g. modification of adjustable rate loans and a government-backed refinancing program generally focused on subprime borrowers, but defaults are accelerating in Alt-A and prime mortgages as well. Even among the government-sponsored enterprises (GSEs), recent mortgage vintages appear to be deteriorating at a faster pace. Thus, programs targeted to a more limited subprime population may be less effective as defaults broaden.

The federal government is likely to bear an increasing share of losses going forward. Financial institutions have now announced over $500 billion in losses over the last year, but have managed to raise $367 billion in capital, largely through issuance of common and preferred stock. However, as some institutions find it difficult to raise capital, additional exposure is likely to fall on the government (can someone say higher taxes?). Also, because a substantial portion of the early losses was related to securitized products, institutions with the most direct link to the government deposit-taking banks and the GSEs did not face immediate risk. This has now changed, as a result of widening losses and government action. As the federal government bears a greater fiscal burden, there is the potential for increasing conflict between policy objectives and political realities. Individual lenders have an incentive to reduce risk to limit losses and preserve capital. While policymakers aim to maintain credit availability, there is pressure on politicians to resolve financial disruptions in the least costly manner possible, as well as a desire to take incremental steps in the hope that more aggressive action will not be necessary.

Apart from the initial steps taken to date, what more can policymakers do? Congress plans to return for one month in September and then adjourn until early 2009. The Bush Administration may take additional action before next January, but without further legislation this would be limited to working within the existing authority that Congress recently granted. The incoming administration and the next Congress face three important questions: first, will the federal government devote more money to cleaning up the mortgage mess? Second, will lawmakers compel greater participation from lenders? Third, how will policymakers balance longer term reform against medium term stability?

So what does all this mean with regards to potential trades? The recent emergence of wider corporate credit and commercial mortgage spreads, GSE worries, and the potential contagion to the rest of the financial sector all do not bode well for the market. Getting above 1,300 required a great deal of inflation worry to be resolved, painfully so for the supposed “growth” areas, but having wrung out that fear and facing the specter of another wave of seemingly imminent financials damage, a pullback to previous lows is far easier to envisage than any break back to the tops of the recent range. The most proximate upside catalyst might very well be government intervention in the GSE space. Over the last year the market has come to respect the power of government action to spark short-lived market rallies, but it may take more damage from here to get that to happen.

A GSE bailout is certainly damaging for equity holders in that space. But as we have seen in the recent past, government intervention may be a market and sector positive, at least in the short term. Getting there may entail some serious pain and, while the nearly explicit GSE put may limit broader contagion in the financials space, it is worth remembering that a capital injection that just repairs balance sheet damage does not mean that GSEs will be open for “business as usual,” and mortgage activity will likely continue to be impaired.

Against this backdrop, though GSEs themselves face the most direct pressures and the entire financial sector is likely close second, housing equities look vulnerable too, with housing activity meaningfully related to GSE fortunes. Mortgage rates are rising despite a bond market rally, pushing mortgage spreads up even more sharply, and bank de-leveraging means further constraints on consumer credit and mortgage lending.

The XHB has outperformed the market by more than 20% since mid-July, as some tentative signs of firming in the data emerged (An uptick in permits, a slowing in the pace of house price declines, and some sequential improvements in the inventory of new homes relative to sales). But there has been little data follow through in the form of continued stabilization, and mortgage centered concerns ought to be the dominant force here, at least for now, with significant room for housing equities to run lower.

One of the symptoms of the weakening economic growth outlook (at least in the market’s estimation) has been the sharp pullback in oil prices. This has led to some significant sector rotations. Consumer areas of the market have been supported, while the energy sector has been damaged. As previously written, I view this rotation as extreme on both counts: Consumer discretionary stocks have taken too much credit for the potential boost to spending from a pullback in oil prices, and energy equities have taken on too much damage. Relative to the market, the broad consumer discretionary sector (XLY) and the retail space (RTH) have rallied; the underlying indices are both up around 5% relative to the SPX since mid-July. With oil price relief the likely catalyst, the magnitude of these rallies looks overdone, exceeding historical “betas” to the oil price move, and in the face of still significant underlying consumer headwinds. The weekly unemployment insurance data point to further labor market damage commensurate with an unemployment rate well into the 6% range, confidence remains at recessionary levels, and consumer balance sheets continue to be de-leveraged as banks cut back on lending.

On the oil side, even if oil prices only stabilize here, energy equities, which have looked inexpensive relative to crude oil all summer long, ought to benefit too. Even after taking into account the sharp pullback in oil prices themselves, the energy sector (relative to the market) looks undervalued.

Given all this data it would appear as if the choice is simple, we are left with only one option (hence the title, A Hobson's choice is a free choice in which only one option is offered, and one may refuse to take that option. The choice is therefore between taking the option or not taking it, colloquially formulated as "take it or leave it.") Expect equities to continue turbulent times and seek safety in wide moat companies, energy specifically is looking appealing given the recent pull back, avoid consumer stocks until future spending looks more promising.

Tuesday, August 19, 2008

From contango back to backwardation...

Summary: Oil may continue to trade in a range bound fashion, but don't expect it to drop too much further, in the medium to long-term fundamentals are nothing but bullish.
To the average American, the US economy is clearly in recession. This is because, in most people’s eyes, a recession is what a recession does: it snuffs out jobs as companies cut output to accommodate a weakening in demand, thus reducing real income. However, the data on GDP have yet to meet what many call the “technical” definition of recession--two consecutive quarters of .negative growth, an oxymoron that only economists could love. In fact, the National Bureau of Economic Research (NBER) the arbiter of business cycles in the United States does not use this definition. In its words: “a recession is a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales.”

The four monthly indicators on this list that the NBER specifically tracks are consistent with the common view that a recession started late last year. The conclusions today are the same as they were then, strengthened a bit by revisions that have steepened the declines in the interim. In particular:

1. The US economy probably hit a cyclical peak last November.

2. The recession has been exceedingly mild, at least so far.

Although the rise in unemployment that most people take as telltale of recession has been anything but mild, all four indicators have held up better than the median for the cycles since 1953. All but real sales have also fallen less quickly than in 2001, when the US economy experienced the mildest recession on record as measured by GDP the only one that shows no year-to-year decline in real GDP. Given this backdrop, it should not be surprising that the lack of a significant drop in real GDP has held up the NBER’s recession call. Even after last month’s annual revision, which produced a tiny 0.2% annualized drop in the fourth quarter, some members of the NBER committee charged with this august responsibility seem hesitant, pointing out that real GDP subsequently rose during the first half of 2008. Conceptually, Gross Domestic Income (GDI) and GDP are equivalent, as sales of goods produced in the United States (GDP) generate income for someone (GDI). Observed differences are statistical in nature. According to a Fed staff study, real GDI often gives a more reliable signal than GDP around turning points.

That being said, we can’t help but wonder if lower energy prices will lead to economic salvation. However, as is usually the case that form of syllogistic reasoning is flawed. Although lower energy prices will assist the consumer it only takes care of one of our “four horsemen of the recession” (the others being: housing malaise, credit freeze, and the indebtedness of the U.S. and its citizens).

Now I shall shift the focus more onto this “correction” in energy. The tug of war between fundamentals tightness and concerns over demand weakness continues to dictate oil price movements, with the latter in the spotlight over the past few weeks. The explosion in the BTC pipeline and the recent hostilities between Russia and Georgia have not only materially disrupted a significant portion of Azeri exports, but have also underscored the vulnerability of oil supplies from the region, which accounts for a good part of the expected year-end supply growth. However, oil prices have continued to sell off to below US$115/bbl regardless.

Although concerns over demand weakness have outweighed fundamentals tightness in the past few weeks, recent data releases confirm that constrained supply and supportive non-OECD demand continue to more than offset weak OECD demand. Declining supplies in mature producing regions and strong non-OECD demand more than countered the 1.1% price-induced decline in OECD demand in 2Q08, leaving total OECD inventories flat in 2Q08 against a seasonal 900 kb/d build, remaining below 10-year average levels for the end of July. The 9.5% annual increase in Chinese demand in July exemplifies that non-OECD countries continue to absorb oil supplies and keep fundamentals tight even in an increasing price environment. Further, last week’s US Department of Energy (DOE) statistics have confirmed a decline in refined product inventories prompted by refinery run cuts, against a backdrop of continued low crude inventories.

While near-term fundamentals remain tight, since the beginning of the year and specifically over the past few weeks’ expectations regarding long-term fundamentals have been center stage. Long-dated oil prices have been driving the rally since the end of last year, accelerating dramatically in May and June, and are now leading the downwards correction. While the 20% sell-off over the past four weeks has been a record decline for long-dated oil prices, it comes on the heels of a record acceleration that had brought backend prices above the trend in price changes that had characterized the market since the end of last year and in the 2004-2005 structural rally. In particular, five-year forward prices had soared to over US$140/bbl at the beginning of July. Despite tight near-term fundamentals, bearish sentiments over future demand destruction have driven the back-end sell-off. Indeed, remarkably, the recent sell-off has been accompanied by signs of strengthening physical fundamentals as prompt WTI timespreads have strengthened over the past few weeks moving into a front-month backwardation. Further, while the price acceleration in May and June weighed on 2Q08 US demand and more modestly on European demand, overall the impact on global demand has likely been modest as is suggested by the unseasonably flat OECD inventories in 2Q08.

The long-term drivers in the market remain intact –trend supply growth has declined and cannot continue to accommodate stable trend demand growth on the back of supportive global economic growth fuelled by emerging markets. Therefore, on a long-term basis, higher prices are necessary to promote a structural demand adjustment and to continue to incentivize investments in production capacity enhancements. While weakening economic conditions in G3 countries coupled with the recent acceleration in oil prices have restrained demand, especially in the US and more modestly in Europe, the necessary structural adjustment required to bring demand in line with production capacity will likely take many years of high prices to promote a meaningful increase in energy efficiency.

While concerns over demand weakness continue to permeate market sentiment, recent data releases confirm that supportive non-OECD demand and restrained supply have more than offset OECD demand weakness, leaving total OECD inventories unseasonably flat in 2Q08 against a seasonal 900 kb/d build. Further, preliminary industry data for July indicates a 28 million barrels increase in total OECD stocks in July, which while slightly higher than the 19 million barrel seasonal build for July, continues to leave inventories below 10-year average levels.

The lack of inventory builds in 2Q08 despite softer price-induced OECD demand and the 400 kb/d increase in Saudi production in May and June underscores extremely tight crude balances suggesting that non-OECD demand has continued to be exceptionally strong and, possibly, that supply growth could be lower than currently estimated. It should be noted that given the 90% yoy surge in oil prices in 2Q08, the 1.1% yoy decline in total OECD demand over the same period has not been surprisingly strong but, if anything, has been lower than would be suggested by standard demand elasticity estimates, likely on the back of supportive power-related demand in Japan. Further, while US oil demand has born the brunt of the oil price surge, given its higher price sensitivity, weaker economic environment and distressed credit conditions, the decline in total US oil demand has not been stronger than in previous economic slowdowns.

More importantly, US gasoline demand growth continues to show a strong correlation with price changes instead of with price levels, underscoring that as oil price inflation moderates in the second half of the year, some pressure on demand will likely be alleviated.

The necessary expansion in oil production capacity remains constrained by escalating resource protectionism at the same time that alternative fuels are proving to have limited scalability. As these constraints are slowing trend oil supply growth against a backdrop of higher world GDP growth, long-dated oil prices need to increase steadily to slow oil demand growth in line with supply on a long-term basis. While the need to curtail demand growth on a long-term basis will likely keep long-dated prices above marginal cost of production, industry costs are re-accelerating at the same pace as they did in the 2005/2006 period.

This indicates that the floor below which long-dated prices are unlikely to fall for a sustained period of time is rising. In particular the historical relationship between industry cost indicators such as the US Oil and Gas Field Equipment and Machinery PPI and long-dated oil prices suggests that the cost-based floor to long-dated oil prices was US$105/bbl in June and is likely continuing to increase.

In other words, don’t bet the farm on oil falling too much further.

Saturday, August 9, 2008

From Russia with Love?

Thanks to some reader suggested input, I will now place the thesis of each post at the very top. Thesis: Long Russia/Long LNG.

For those of you who have read my prior posts you might have realized that I am relatively bullish on certain foreign economies, with Russia being one of them. The Russian thesis in a nutshell is: they have an immense amount of natural resources which should drive their domestic economy allowing the government (via heavy export levies) to invest substantial amount of domestic infrastructure which should help spur development in non-natural resource based industries, this coupled with the fact that I believe their currency is currently undervalued should provide a U.S. investor an interesting return spectrum. The risks to this thesis are obvious: inflation, Dutch Disease, government risk (think recent events with Mechel or Yukos), and most recently war with Georgia.

As you probably have heard Russian tanks crossed into South Ossetia Friday after Georgia launched a major military offensive to recapture control of the separatist province on Thursday night. In Moscow, Russian equities tumbled, as investors turned nervous following news of the escalating situation. The benchmark RTS stock index fell 6.5%. The index has declined 24.8% this year (this decline is due to three things: 1. Putin’s recent move against Mechel, 2. Falling natural resource price and 3. Conflict with Georgia. The Russian currency, the ruble, fell more than 1% against its dual currency basket Friday. South Ossetia has a population of 70,000, most of whom are not ethnically Georgian, but close to the Ossetians in Russia's province of North Ossetia. A destitute region, South Ossetia has received two-thirds of its $30 million budget from Russia and the majority of its population holds Russian passports, according to Global Insight. Russian state-controlled gas giant Gazprom is building a pipeline to the region as well as infrastructure. For Russia, South Ossetia is a useful means to undermine and cause inconvenience to the unfriendly Georgian government, which sees itself as the U.S. outpost in the post-Soviet space and seeks to join NATO, which is very annoying to Russia. Politics aside one can’t help but wonder what could be the end result financially speaking. The likely result is that the fighting will continue until Russia is allowed to either remove the people or claim the territory; I view the former as the most likely scenario. Although Georgia does control reasonably important pipeline territory Russia has already been finding ways to build around it. I think the recent sell-off in both the equities and currency is overdone.

Demographically speaking Russia does face certain challenges. Russia stands out for its high levels of educational and scientific achievement. But the fiscal crisis of the 1990s caused a ‘brain drain’ of many of its top researchers and difficulties in recruiting new teachers. The country still needs to go some way to restoring the quality of its schools and universities, while adapting them to the demands of a knowledge-based economy. Demographics pose one of the most serious challenges to Russia’s long-run growth potential, and have a direct, negative impact on the future size of the economy. The US census bureau forecasts that Russia’s population will shrink from the current 142mn to under 110mn by 2050, with the workforce contracting after 2009. So far, the government has offered incentives to mothers to have more children, has begun to invest more in health care, and has promised to promote a healthier lifestyle. As the government begins to invest more domestic infrastructure that will drive job growth which will spur immigration from surrounding countries. Just as in the other BRIC nations, Russia needs to improve its infrastructure significantly. Because Russia is already reasonably urbanized, its need is not in the same league as China’s or India’s. Nonetheless, Russia has plenty of scope to improve its transport systems, linked to the rapidly rising wealth of Russians. The airline/airport infrastructure need appears to be especially strong, and it represents both a challenge and a significant business opportunity.

The question then remains will commodities remain high enough to fund the backbone of the Russian economy? The conflict in Georgia might act to disrupt Russian oil & gas supplies to Europe (they could also tighten the spigot as a form of political pressure for EU neutrality or support). Speaking on a more macro level, there has been a substantially negative shift in sentiment owing largely to concerns about commodity “demand destruction” in the context of both slowing global economic growth and substantial commodity price increases this year. Concerns about increased supply availability owing to OPEC production increases and substantial improvement in US crop conditions and development post the slow start to the U.S. planting/growing season and the Midwest flooding have also contributed to recent sharp price declines. Although US and broader OECD demand for oil has weakened substantially over the prior six months in response to rising prices, this weakness has been necessitated by extremely disappointing non-OPEC crude oil supply growth –down 650 thousand b/d year over year in June – in the context of still strong emerging market demand. The US in particular has borne the brunt of the demand declines relative to the rest of the world because lower taxes, a weaker economic environment and tighter credit conditions have left US consumers most sensitive to rising prices. Despite substantial US demand weakness, US total product inventories have failed to build meaningfully and US crude oil inventories actually remain at critically low levels, providing further evidence that any supplies made available by US demand weakness are being consumed by emerging economies. This lack of an inventory build also underscores that recent increases in OPEC production have only served to offset substantially larger-than-expected production declines in places such as Mexico, Venezuela, Russia and the North Sea. As the rise in prices earlier this year is very consistent with the magnitude of the resulting demand weakness based on historical relationships, it is likely that the demand weakness has simply been induced by the rising prices and is therefore temporary rather than more permanent demand destruction.

I will now spend some time focusing in on a few key commodities.

Black Gold:
Oil prices declined by almost 15% in July and another 4% so far in August primarily as concerns over global economic growth and weakening oil demand have triggered a sharp financial liquidation. WTI crude oil open interest has plummeted to the lowest levels since the beginning of 2007 and speculative length has declined to lows reached at the beginning of the year when oil prices declined by 13% - similar to the recent sell-off. As a result, prices have declined to levels where large open interest in put options is concentrated, underscoring the risk of further selling pressure as financial traders who sold the puts need to sell further contracts to delta hedge their portfolio – traders call this the “negative gamma effect”. Recently, the U.S. consumer has borne the brunt of the necessary demand adjustment because lower taxes, the weak U.S. dollar, a soft economic environment and tighter credit conditions relative to the rest of the world have left the U.S. consumer most sensitive to price. Accordingly, U.S. oil demand has been exceptionally weak. However, the magnitude of weakness has been consistent with the rise in price, suggesting that this weakness is likely transient rather than more permanent demand destruction and could reverse on stabilization or decline in prices. Importantly, this demand weakness on top of recent increases in OPEC production is not leading to meaningful inventory builds as emerging markets are consuming the available supplies, and as OPEC production increases have largely served to offset non-OPEC production disappointments. Since the beginning of May, total US and OECD oil inventories have built less than seasonal norms and have declined below 10-year-average levels while US crude oil inventories remain at critically low levels. A strong rise in Chinese refinery runs - up 7.2 % year over year in June despite the 20% increase in controlled domestic prices announced on June 20 – underscores the emerging market demand strength. Overall, while spare oil production capacity is extremely low, inventories remain below 10-year average levels, underscoring that global demand for oil is not falling significantly below supply. Goldman Sachs recently reaffirmed their year-end price target of $149 which is a full 29% above Friday’s close. In my opinion I think this forecast might be slightly high, given the negative demand dynamics associated with EU and US consumers I am leaning more towards a year-end price target of around $130 which is about 13% higher than today’s prices.

Natural Gas:
NYMEX Natural Gas closed at $8.248 with WTI Crude closing at $115.20. Historically, crude oil has traded at about a 6-8 multiple to natural gas, currently the ratio is 13.96x. Natural gas was the worst performing commodity in July, as prices declined 46% in the period (vs. a 15% decline in Oil), disconnecting from international natural gas prices and widening their discount to the oil complex, largely on the back of economic concerns that have generated downward pressure across the commodities complex as well as a meaningful softening of the US natural gas balance. Specifically, despite modestly hotter-than-normal weather in July, natural gas inventory builds over the last few weeks have been substantially above average, leaving inventory levels only 6 Bcf below 5-year average levels from a peak deficit of -78 Bcf in the week of July 4, 2008. On the supply side, US pipeline imports from Canada, although still down year-on-year, have reduced their differential to 2007 levels by more than 400 mmcf/d or 38% in July relative to June. Going forward, expect no meaningful recovery from Canadian exports to the United
States due to still low Canadian gas rig counts and no significant displacements of natural gas-fired generation, now that the excess water supply has been depleted and natural gas/coal differentials are at near record-low levels. Goldman Sachs recently came out with an October price target of $13 which is 57% above current levels. I think this forecast is a little overly bullish. It relies significantly on a strong hurricane season and a large amount of cold weather in both September and October. I think a fairer price estimate would be in the $11.50 range which is still 39% higher than current prices.

On the equity side, even after accounting for the pull back in commodities, the consumer and energy shifts look extreme. The equity damage in the energy sector has outpaced the commodities themselves. In fact, the recent disconnect between equities and commodities are on the high end of their historical relationship. Part of the equity drag has been a reflection of the underperformance of large cap refiners, with margins under extreme pressure. In fact, refiners look more like industrial oil users than parts of the energy sector. But even when looking at an equal-weighted version of the energy sector, the gap to commodities is at the top end of the range.

Given the recent pull back in commodity prices the risk/return dynamics have been favorably skewed. It would be wise to re-adjust your portfolio allocation to this specific sector. Given that Russia is the largest producer and exporter of LNG it might also be wise to take a look at it. The short-term risks with Russia are over blown; the real worries lie in inflation and long-term growth (i.e. bulking up non-natural resource dependent sectors of the economy).