Tuesday, December 30, 2008

Oil is not well - 2

The brave have fallen, and they have fallen hard in the times. Oil was one of the best performing commodities in 2008 till it started falling, and fell it did hard.

Now literally on its knees, people have shunned it like a pariah.

Just to give you a relative perspective let us see the following commodities which are off from their 52wk highs

Commodities % drop from their 52wk highs
Oil 75%
Copper 70%
Nat Gas 57%
Silver 50%
Gold 15%

So, in 2008 - commodities have fallen hard and the related stocks in many cases have performed worst. Thus, naturally - the majority have gone foul on commodities many proclaiming, 'the bust of commodity super cycle'.

But we dont think so. The argument that demand destruction is greater does not hold good when it is seen in the light of the fact that the new resources of commodities are being increasingly getting more expensive to get into production. Eg. shale oil in Canada needs atleast $80 a barrel of oil price to make the project viable or roughly 70% of the new exploration in gold mining is done by juniors and by the way HUI index fell to 150 levels, has raised serious questions about the ability of the juniors to get capital to carry out the existing projects or start new ones and coupled with low gold prices, it is definitely impacting the ability of new production to come above the ground in time.

Moreover, China which now has a much greater role to play in commodity markets as it is one of the rice setters due to its consumption binge, is now gearing up to increase its GOLD AND OIL RESERVES which is being increasingly seen as strategic commodities by its top policy makers.

Like: Zhang Guobao, head of the National Energy Administration, said:

The severity of the economic downturn has brought a marked decline in demand for oil and unprecedented pressure on prices. The amount of crude oil on the international market still far exceeds global demand.

China will push ahead with building the second phase of its strategic oil reserves, having largely completed the first, Zhang said.

One of my friends working in Cairn India, is worried these days about the price of oil going down. But I see his worry not lasting too long, due to the supply issues rearing up their heads soon enough.

For future, prices estimated by the experts are the following and on the upper side of the $38 a barrel it is trading at today.

For 2009
Deutsche Bank is estimating average price of oil @ 47.50 in 2009
Merill Lynch @ 50
Moodys @50
Goldman @45 but drop to $30 in first quarter
Marc faber is buying oil at these prices
Jim Rogers says oil will reach @200 in 2013

Now I would go by the last two experts as over the years they have been proved right again and again.
So gear up for the next up leg in oil which is not going to be pretty until and unless you are invested in it.


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