"A Contrarian Look at Crude Oil"
By Christopher Edmonds
Special to RealMoney.com
5/14/2004 2:30 PM EDT
SAN FRANCISCO -- "Oil prices just have to go lower."
As I traveled this week along the West Coast and talked to energy investors, I heard that phrase in almost every conversation. If you heard those words from a lot of smart people, like I did, you might start to believe that there's simply no way oil can stay at $40 a barrel.
Not so fast. As I was quick to point out every time I heard that line, "That's what everyone said at $30, and the price kept going higher."
Of course, ever-rising prices eventually have to come down. That's likely true at some point, but, being the contrarian I am, I see plenty of reasons to believe that crude prices will remain high. Here are a few of them:
A growing economy: A common belief is that high energy prices will lead to slower economic growth, but what if a stronger-than-expected economy helps to push up commodity prices? If the economy keeps growing, that will support higher -- not lower -- energy prices. The International Energy Agency boosted its energy demand forecast earlier this week to its highest level in more than a decade. All other things being equal, more demand means higher prices.
China and India: The consensus is that China's growth is about to hit a wall. If that doesn't happen, demand will rise in the coming months. India's growth could also call for ever-increasing supplies of crude.
OPEC supply: A month ago, we were talking about a flood of supply from OPEC. Now, at least one OPEC member is begging for more production. Problem is, only Saudi Arabia has enough additional capacity to make a difference, and some pundits, such as Matt Simmons of Simmons & Co., suggest that Saudi reserves are seriously overstated.
Supply disruptions: The recent build in the U.S. Strategic Petroleum Reserve and the growth of reserves in other countries, including China, may hint that political leaders are concerned about delivery interruptions from the Middle East. If that happens, it won't matter how much oil is in storage: Prices will spike.
Non-OPEC supply: Norway is fighting depleting fields, Mexico just cut its exploration-and-production budget, and Russia is fighting fraud and tax laws that discourage additional drilling. What happens if OPEC can't meet demand for crude in the Western world? Supply would be constrained, and prices will go higher.
Other variables will also impact price, but that list is a solid start. If you believe as I do that these factors are real, crude prices could remain higher for longer than most expect.
In addition, as I mentioned in the Columnist Conversation earlier this week, there is psychological significance to breaking the $40 price level. Former ceilings, especially those at round levels, tend to become floors once breached. If Thursday's crude trading is believable, $40 held and it will be hard to break back below it absent a major supply or demand development.
The economy has shown its strength in the wake of higher oil prices. I really want to bet against the common belief that oil will sharply correct in the near future, but I need another week of strength above $40. If that happens, $50 may be the next round number in crude's future.
Have a great weekend. "
(in
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Enviado: 17/5/2004 11:35