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June 21, 2012

Energy prices are an ongoing concern for consumers as well as for energy producers and companies in the manufacturing sector. In the past few years, there has been a seismic shift in U.S. energy production as improved extraction methods have increased the supply of natural gas—and, more recently, oil—which is weighing on prices. Tim Parker, who manages T. Rowe Price's natural resource stock portfolios, says that in-depth research into low-cost energy producers and industrial beneficiaries of lower energy prices can reveal investment opportunities amid this favorable development for U.S. manufacturing and the U.S. economy in general.

  • While the U.S. still imports large quantities of oil to meet its energy needs, the country has a much greater supply than it did just a few years ago. Dependence on global oil imports could decline in the years ahead.
  • An extraction method called fracking—fracturing through hydraulic stimulation—enables energy producers to crack open hard rock and access resources that previously could not be reached.
  • While fracking has been used for 50 years, it is now being used more intensely at each well—horizontally, in many cases—resulting in a substantial pickup in natural gas and, increasingly, oil production.
Increased Natural Gas Supply Has Dramatically Lowered Prices
  • Fracking in long horizontal wells in the natural gas shale basins has resulted in tremendous shale gas production growth.
  • Overall, U.S. natural gas supply increased by approximately 12% year over year in January.
  • Demand for natural gas, however, grows at about 1% per year; thus prices have been driven down as new supply has flooded the market.
Consumers and Industrial Firms Are Benefiting From Lower Energy Costs
  • Applying fracking technologies to U.S. oil basins has led to increased output for the first time in decades.
  • Due to increased supply, U.S. oil prices are about $15 per barrel less than in the rest of the world. This translates into savings of about $0.30 per gallon of gasoline, thus offering some relief to consumers.
  • In addition, manufacturing and industrial companies that are big users of energy are now at a more advantaged cost position relative to their global peers.
Lower Prices Challenge Energy Producers but May Create Other Investment Opportunities
  • Energy producers that can maintain low operating costs or find new oil and natural gas reserves are still attractive.
  • Chemical and paint companies using natural gas-linked hydrocarbon inputs may now have a cost advantage over global companies using oil-linked hydrocarbons.
  • Heavy energy users, such as metal fabrication and steel production companies, may also be attractive.
  • Ultimately, lower energy prices are strengthening the manufacturing environment and benefiting the U.S.

There are inherent risks associated with investing in the stock market, including possible loss of principal, and investors must be willing to accept them. Because of the cyclical nature of natural resource companies, their stock prices and rates of earnings growth may follow an irregular path. Factors such as natural disasters, declining currencies, market illiquidity, or political instability in commodity-rich nations could also have a negative impact on various portfolio holdings and cause a drop in share prices.

The views are as of June 14, 2012 and may have changed since that time. This information is provided for informational purposes only and is not intended to reflect a current or past recommendation, or investment advice of any kind. Opinions and commentary do not take into account the investment objectives or financial situation of any particular investor or class of investor. Investors will need to consider their own circumstances before making an investment decision.

T. Rowe Price Investment Services, Inc., Distributor.

Copyright 2014, T. Rowe Price Investment Services, Inc., Distributor. All rights reserved.