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The only way is up, for oil!

Posted on January 22, 2007 by Richard Beddard
Filed Under Investing |

There is a reason for the exclamation mark in today’s headline. It’s a subtle indication that I haven’t a clue whether the assertion I made in it - that oil prices are going up - is true. However, many do have a view, and the view of my arbitrary selection of experts is almost unanimous. Despite the fact that oil prices have plunged in the last month, the only way is up, at least in the long-term.

In Big unpopular BP, Interactive Investor’s stockpicker, Edmond Jackson, isn’t put off oil despite a cocktail of factors drowning oil prices this month:

Warmer weather, slightly slower fourth quarter US growth, Russia pumping hard, OPEC countries cheating on agreed production quotas, Saudi Arabia cutting its oil price on 2 January - all these issues came at once and were seized on by powerful financial traders to accentuate the price fall.

But, he says:

For long-term investors, the key facts are the emergence of China as perhaps the nation of the 21st century, no major oil discoveries, and the depletion of global reserves.

Professor James Hamilton at Econbrowser says demand is rising and production, at least in Saudi Arabia, is falling. He discounts talk of easing geopolitical tension and also fingers speculators for lower oil prices, offering them some advice:

Until U.S. and Chinese oil demand are kept in check, and until big production increases are forthcoming, it’s hard for me to see how the price could continue to plunge.

Jim Rogers, the hedge fund manager who met success early in life and retired to give speeches and write about managing the fortune he made, was perhaps the first to tell the story of China’s rapacious consumption and how it would lift all commodity prices. He launched a commodity index in 1998, wrote a book - “Hot Commodities” - in 2004 (here’s a review by the Rev. Dr. John Santosuosso of the Financial Seminary) and is, still talking up oil prices now.

But Julian Lee of the Centre for Global Energy Studies presented a different case on Bloomberg TV today. He sees demand for oil rising only 1% this year, while calculating Saudi Arabia might be prepared to see prices fall to $40. Contrary to the others he says prices might rise in the short-term as cold weather finally sets in, but fall in the longer-term as new oil fields come on stream. No mention of China, or the lack of major new oil discoveries though, which makes me wonder whether his view is as long-term as the others.

Here’s what some Interactive Investor users think about oil prices:

Oil update (Wed 24 January 2007)

Comments

3 Responses to “The only way is up, for oil!”

  1. Bob Rankin on January 24th, 2007 9:08 pm

    In 1981, when oil prices had been rising for a while, I sold my first house and for the first time in my life had a bit of capital. I made the mistake of thinking that oil would continue to be in short supply - as a result of which, oil company shares would outperform. I bought Tricentrol.

    It was only for a short while after the event that I regretted that poorly-judged purchase. It showed me how capable the market is to responding to the laws of supply and demand. In the longer term, my mistake was a good-value piece of education. In market terms, nothing seems to be for ever.

  2. Richard Beddard on January 25th, 2007 9:05 am

    Thanks for the salutory lesson, Mr Rankin. I’m repeating a story that has been re-told so many times it’s assumed to be inevitable; ‘it’s different this time’ because, at the risk of oversimplifying, Chinese consumption is increasing relentlessly and oil is ‘running out’. That story trumps (or at least extends) the normal ebb and flow of prices and investment in the oil industry. I’m curious - most investors have learnt to their cost it rarely is ‘different this time’ so I’m looking for an ‘expert’ who breaks with the consensus. It ought to be possible. Governments are gradually taking action to wean us off our oil addiction for environmental and strategic reasons, for example. And how certain are we about the twin pillars of the bullish case: China, and dwindling supplies?

  3. The case for lower oil prices | Interactive Investor Blog on February 1st, 2007 12:36 pm

    […] Last week I claimed the only way is up, for oil! A sentiment that represents the consensus reported in the media; that rapacious Chinese consumption and the notion that oil must run out some time, will keep prices high. […]

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