Bill Cara: The prospects for much higher oil prices, Wed., May 3, 2006, 12:33 PM

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May 3, 2006

The prospects for much higher oil prices, Wed., May 3, 2006, 12:33 PM

Is the current precious metals market merely a stalking horse by OPEC? I have a reader who thinks so.

"My own view, Bill, is that the run in gold -- you'll remember my theory that the current run is just a stalking horse for one to come -- will be matched and indeed far outdone by a run in oil, NG, and BM -- which have 'use' value, and not simply 'exchange' value."

If so, the implications for traders are enormous. Oil drillers and alternative energy are just the start. Inner city residential is another.

$100 oil is going to change the way we live. There is certain to be deflation in other sectors.

Maybe that's why I have long been been saying that metals, certain energy stock groups and U.S. capital goods exporters ought to be favored in portfolios. And cash will be king.

Posted by Posted by Bill Cara on May 3, 2006 12:33:41 PM | Category: 10 Energy , Gold

Discourse

More on the debate regarding Peak Oil --
Here are two brief posts picked up from a very knowledge energy board --

(1) The EIA world oil production figures for Feb 2006 have been released: http://www.eia.doe.gov/emeu/ipsr/t14.xls

Total: 84.33 Mbpd
vs Jan 2006: - 38 000 bpd
vs Dec 2005 peak: - 371 000 bpd

(2) Not one OPEC country has increased production since Sept. 2005. Total supplies (OPEC and non) have apparently plateaued.
For a very good graphic illustration and clear explanation, see this link:
http://www.theoildrum.com/story/2006/5/2/22318/01508#more

One finds the sell-side (both financial and industrial) almost unanimous in the claim that the world is really awash in oil. But a huge majority of private investors -- who have their OWN hard-earned money on the line -- and who specialize in energy issues (from bloggers to some of the smartest stock boards you can find) aren't buying it. One of the two is likely to be proved very wrong.

The current run in gold, which may be signaling inflation (and hence a run in commodity prices), could eventually crack -- and a global recession could ensue. But the supply and demand equations for oil, gas, uranium, copper, zinc, platinum, steel, etc. etc. will only deteriorate in the intermediate and long term as 2.4 billion people try to adopt a 21st century lifestyle. And so the NEXT bull run in these 'hard' assets is likely to be really shattering.

Posted by: AT at May 3, 2006 12:51 PM [link]

AT, Excellent point. That's the one I was making in this week's WIR, i,e, we ain't seen nuthin yet. As long as the authorities in China and India can keep interest rates down, their 10-pct annual growth rates in GDP will continue unabated, and there will be a heightened 'use value' as you say.

U.S. capital is flowing into China and India because interest raes in the U.S. are too low. That capital is financing the rapid growth in those emerging economies. But to reverse the capital flow, U.S. rates need to rise higher. The problem now, as everyone sees, is that the Fed cannot raise rates too far without killing the housing market.

So, with manufactured low interest rates, the $USD is falling, and OPEC want to get paid in "real" Dollars, not wooden nickels.

OPEC knows there is a 'use' value in crude oil, and so they are pushing up the price of oil, while telling the CNBC audience (those who foolishly listen) that they are doing all they can to increase production, and so forth. NOT.

Posted by: Bill Cara at May 3, 2006 1:05 PM [link]

It is worth to keep an eye on the gold oil ratio which seems to bottom last year.

http://globalgold.blogspot.com/2006/04/importance-of-dow-jones-gold-gold-oil.html

Posted by: real1 at May 4, 2006 12:15 AM [link]

China has turned from a steel importer to an exporter since the beginning of 2006. The net export of steel in Jan was 234,000 tons,597,000 tons in Feb and over 1 million tons in March. As of April 26, the net export of steel reached 2.87 million tons.The current steel prices in North American and Europe market are $100 to $200 higher than the price of steel made in China, so it is expected that export will keep increasing. In 2006, China will produce 450 million tons of steel, far over its domestic demand. The Custom of China estimated the net export could reach 10 million tons this year (30 million tons export vs. 20 million tons of import).
If the saying "buy what China buys and sell what China makes" is true,it seems steel companies in North American and Europe will face some price pressure from now on. Could it be a turning point for them?
Good luck and happy trading.

Posted by: SmallCapFan at May 4, 2006 4:34 AM [link]