Oil to hit $120 - and soon
Garry White - Thu 13 Mar, 2008
The oil price has further to run and will hit $120 thinks Smart Commodities editor, Garry White
The oil price has further to run thinks Smart Commodities editor, Garry White
Oil to Hit $120 - and Soon
By Garry White
I’m still a buyer of oil at today’s price of $108 plus… In fact, I’m sticking my neck out and telling you I think that WTI contracts are going to hit $120 – and it’s going to happen soon…
The era of cheap oil is well and truly over; it is never going to return. Even Alistair Darling, knows this… That’s why he postponed the scheduled fuel-duty rise in yesterday’s budget statement as fuel inflation bites.
Be in no doubt, the current oil-price surge is being driven by one factor alone – the stumbling US dollar.
Investors are not stupid… we all know where the dollar is heading. As the dollar falls and inflation for basic goods rises, investors are looking to protect their assets… this is driving the demand for commodities. And this is why the oil price has hit new highs on a daily basis for the past week…and why it will continue to hit new all-time highs in the next few weeks.
The dollar will fall further. Interest-rate futures show that the market sees a 62% chance the Federal Reserve will cut its benchmark rate by 75 basis points to 2.25% on 18 March. This is a staggeringly inflationary move, but not unsurprising. The only thing Bernanke appears to have learned from his predecessor is how to print money.
That’s bad for the long-term outlook for the US economy, but good for commodity investors over the next few months. The dollar fall will cause our commodity investments to rise as investors switch to the sector to protect their wealth from the fallout… it is as inevitable as night following day.
I never thought I’d feel sorry for the American middle classes – but I do now. Not only are costs of living rising at a time where their homes, pensions stocks are decreasing in value, but the Federal Reserve is now using their hard-earned cash to bail out bad decisions from the banking industry… to the tune of $200bn. That’s $664 for every man woman and child in the country.
Of course, it is not just the staggering and stumbling dollar that is driving the price, but it is the most significant and relevant today. The other factors that drive the oil price – supply, demand and geopolitical tensions – are almost irrelevant.
Yesterday the International Energy Agency (IEA) cut its forecast for 2008 oil demand by 80,000 barrels a day to 87.54 million barrels, but oil futures have actually rose. The Agency is still forecasting a total 2% increase in oil demand this year, which is probably too high bearing in mind the recession in the US, but the Asian tigers are still hitting the pumps.
China and the Middle East expected to add about 400,000 barrels a day each this year. The IEA forecasts consumption will rise 6.1% this year in the Middle East and 5.6% in China.
The US recession is likely to stifle oil demand in 2008, but I remain a demand bull looking further out. In fact, as today shows, no-one is paying attention to demand figures… the dollar is much more important.
I don’t expect OPEC will hike production any time soon either. The IEA said that the oil cartel which accounts for around 40% of global production would need to pump an average of about 31.8 million barrels a day this year in order to balance global demand. Currently OPEC is pumping less than 30 million barrels a day and there is no sign of a production rise.
This is a wise move by OPEC. If the cartel increased production I believe it would have little effect on the current oil price. OPEC has always wielded its power with relish… It does not want the world to see that at the moment it has no power to control the oil price. That would be a humiliation.
I think most oil-price forecasts by analysts are dead wrong. According to Reuters, the current consensus for the average oil price in 2008 is in the mid-$80 area. This consensus is far too low. It will rise.
The Fed will cut interest rates further… speculators will try to preserve their wealth by moving from the dollar to commodities. The rises in the oil price is not over yet; not by a long, long way. That’s why oil producers are a must for your portfolio; they have the earnings leverage that you need.
Regards,
Garry White
For The Daily Reckoning
Editor’s note: Garry White is the UK editor of Smart Commodities, a natural resource and biotechnology investment newsletter. This essay was re-published from his free eletter, Garry Writes.
