Stock Ideas 
Stock Ideas Investors Daily Edge The International Energy Agency (IEA) Estimates
Stock Ideas Investors Daily Edge The International Energy Agency (IEA) Estimates 
Market Watch
| Owning silver is always a great idea. Not only does it offer you protection from financial catastrophe, but it could also give you a good return on your investment. | |
| More... |
Most Popular
Login Form
| The International Energy Agency (IEA) Estimates |
| Wednesday, 10 September 2008 | ||||||||
|
All the major fields have already been discovered, they said. Meanwhile, global demand – especially from big emerging markets like China and India – keeps rising. Yet Friday, oil sank below $106 a barrel as a jump in unemployment signaled to traders that Americans will be paring back on their energy use. This was yet another blow to crude prices. Oil has plunged $40 over the past two months. What’s going on here? Let’s take a dispassionate look at what’s happening with crude prices, beginning with the obvious: No one from Ben Bernanke to T. Boone Pickens can tell you how high or how low oil is headed with any certainty. If it were possible to forecast supply and demand this way, we’d all be trading oil futures from our beachside huts in Bora Bora. However, there is always a sure sign that the price of anything has reached La-La Land: Ordinarily sensible people start spouting nonsense. You know, “The Internet is forever,” “They’re not making any more real estate,” that kind of stuff. Take “the world is running out of oil” with the same grain of salt. It’s different this time, the oil bulls say. China is growing so fast that it is gobbling everything up. Ho-hum. This story is old news. Yes, China is growing at roughly 10% a year. But, if anyone cares to notice, it has been growing at this rate for over two decades now. It didn’t just jump into the world economy when oil was $15 a barrel a few years ago. Another sign of a mania was the major media, which kept making meaningless statements about oil. For example, a few weeks ago The Washington Post, in an article explaining why oil had nowhere to go but up, quoted one consumer who said: “If you don’t have gas, you can’t get to work. And if you can’t get to work, you don’t get paid. And if you’d get paid, you can’t buy food. We’re at their mercy.”
Is this what passes for economic analysis these days? Come on. We’re all dependent on oil. That’s a given. And the world will need even more oil in the years ahead. But this is just the back story. It doesn’t tell us where oil should be trading now. Ultimately, that will be decided by supply and demand. And those factors suggest lower prices. The International Energy Agency (IEA), the Paris-based energy watchdog of the world’s richest nations, has lowered its forecast for world oil demand growth by 460,000 barrels a day. The IEA also sees supply from outside OPEC growing by over a million barrels a day, the strongest growth since 2004. Anyone who has taken Economics 101 knows what increasing supply and decreasing demand does to prices. (Look out below…) The price of oil always sows the seeds of its own collapse. People say consumers are trapped. But not entirely. We can drive less. We can use mass transit. We can buy more fuel-efficient cars. Consumers will conserve. More money will be invested in alternative energy sources. Producers, too, will search for and bring to market oil that was once too costly to extract. Eventually, supply and demand will come back into balance. Don’t get me wrong. You won’t see $30 oil or $1.50 gas again anytime soon. And probably never. Two decades ago, the world could pump 15% more oil than it needed. Today that spare capacity has practically vanished. It’s now about 2% beyond the world’s total daily consumption of roughly 85.5 million barrels. That makes the oil market exquisitely sensitive to rumors of anything that might endanger existing production. A terrorist group in Saudi Arabia or insurgents in remote parts of the Niger Delta could turn the world oil market upside down very quickly. (And send oil higher again.) But barring a major supply disruption, fundamentals point to still lower oil prices. The Energy Information Agency announced recently that, “U.S. oil demand during the first half of 2008 fell an average of 800,0000 barrels per day compared with the same period a year ago, the biggest drop in 26 years.” This further supports my “bubble theory” of oil. Crude prices were actually soaring in the first six months of this year while demand was taking the biggest drop since 1972. How long could we have expected it to last? It was “animal spirits” – speculation – that drove oil prices higher while fundamentals deteriorated. As confirmation, The Wall Street Journal reported two weeks ago that, “Data emerging on players in the commodity markets show that speculators are a larger piece of the oil market than previously known… the number of futures and options contracts held by traders counted as speculators – those who don’t have a commercial need to mitigate the risks of energy prices in their business – rose to 49% of all crude-oil bets outstanding on the New York Mercantile Exchange, up from 38%.” Bear in mind, under normal circumstances, speculators are a help not a hindrance. They add liquidity to the market. And when they distort prices – as they occasionally do – it gives us opportunities to sell at inflated prices or buy at unreasonably low prices. The only investors who get hurt are the ones who buy into the hype – in this case the “peak oil” story – and get trampled when prices revert to the mean, as they always do eventually. So perk up. Lower oil prices are good for the economy and good for the stock market. And if there is no unexpected disruption in supply, it’s reasonable to expect oil will soon be trading well south of $100 a barrel. P.S. To let me know what you thought of today's article, send an e-mail to: This e-mail address is being protected from spam bots, you need JavaScript enabled to view it
This investment news is brought to you by Investor's Daily Edge. Investor's Daily Edge is a free daily investment newsletter that is delivered by email before the market opens. It's published by Fourth Avenue Financial, a subsidiary of Early To Rise (an affiliate company of Agora Publishing). In each weekday issue you'll receive practical strategies for protecting your portfolio and multiplying your money. You'll also learn about undiscovered opportunities in emerging sectors and markets, deeply discounted stocks, recommendations for bonds, cash, commodity and real estate investing, and top ETFs. To view archives or subscribe, visit Investor's Daily Edge .
|
||||||||
| < Prev | Next > |
|---|