The Case for $200 Oil

On Tuesday I wrote a post about the prediction from a Goldman Sachs Analyst that Crude Oil could hit $200 a barrel, $200 Crude Oil-surely not ? today I want to spend a bit more time looking at some of the reasons why that is not a crazy prediction and may even be on the low side.

The world’s known supply of crude oil has decreased by about 13% since 2001 It was estimated that the total world supply of Crude Oil was around 2 trillion barrels. We have already used around half that in about 150 years. As the planet’s supply of oil slips below one trillion barrels, and America’s pile of liabilities soars above 54 trillion dollars, crazy things might start to happen – crazy things like $200 oil.

But crude oil is not the only natural resource that is depleting and/or in short supply. And the U.S. dollar is not the only currency on fertility drugs. So a forward-looking investor could expect to see the prices of most major commodities rise in terms of most major currencies. But this simple conclusion is easy to miss when most of the relevant data points contain nine to twelve zeros.

Most of us have some vague idea that one trillion is the number that lies somewhere north of one billion ,beyond that, we have no clue. So how much is one trillion anyway?

• 1 trillion seconds = 31,546 years.
• 1 trillion dollar bills placed end to end would reach 96.9 million miles, far enough to reach the Sun.
• The average new car costs $28,400. $1 trillion would buy more than 35 million cars.
• The entire Federal budget is $2.8 trillion. A stack of that many dollar bills would circle the Earth more than 7 times.
• Gross Federal debt is more than $8.7 trillion, which would make a stack of dollar bills that would reach from the Earth to the Moon and back with some to spare.
• $8.7 trillion in one-dollar bills would cover an area larger than each U.S. state except for Alaska and Texas.”

 

But there is something else at play that doesn't help the situation-the weakening of the US dollar which helps pay off the US debt but it also has some undesirable results in the form of $1000 gold and $120 crude oil.

In other words, the skyrocketing oil price is as much a monetary phenomenon as a geophysical one. Paper currencies and debts proliferate rapidly. Natural resources do not. That’s why the prices of natural resources like crude oil MUST increase over time. And that’s why you should listen to that little voice inside your head when it tells you: “$200 crude oil may be crazy, but not nearly as crazy as the size of the US Deficit.”

We are running out of Natural Resources there is no doubt, it is unlikely that we will see them completely depleted in most of my readers lifetimes,however if the Dollar continues lower (or is allowed to weaken to cover up for poor fiscal policies) then it will accelerate the incessant rise of these Natural Resources.Since the vast majority of Natural Resources are paid for in Dollars it stand to reason that as the resources become scarcer and the dollar becomes worth less that suppliers will be demanding more of them for whatever it is they have to sell.

Best Wishes

 

Alan

 

Technorati Tags: $200 Oil,Commodities,US Dollar,Strong Dollar Policy,Oil

$200 Crude Oil-surely not ?

  It wasn't that long ago that Goldman Sachs printed the "crazy prediction that Crude oil would reach over $100 a barrel .well they are at it again and who would dare doubt them this time. The story below from Bloomberg quotes the analyst behind that earlier prediction Arjun Murti as saying that within two years we could be seeing oil hitting between $150 and $200 a barrel. I wrote about Peak Oil and its impact in this article Has Oil Peaked ?

Based on this prediction it most definitely looks like there is a growing acceptance(unless you are a Politician or in Saudi Arabia) that we may actually be running out of oil. If this prediction comes true (like the last one did) then it really will have some ramifications for the world economy and possibly also stability.

 

 

May 6 (Bloomberg) -- Crude oil may rise to between $150 and $200 a barrel within two years as growth in supply fails to keep pace with increased demand from developing nations, Goldman Sachs Group Inc. analysts led by Arjun N. Murti said in a report.

The price of crude traded in New York averaged $56.71 in 2005, $66.23 in 2006 and $72.36 in 2007. Oil rose to an intraday record $120.93 today on speculation demand will rise during the peak U.S. summer driving season.

``The possibility of $150-$200 per barrel seems increasingly likely over the next six-24 months, though predicting the ultimate peak in oil prices as well as the remaining duration of the upcycle remains a major uncertainty,'' the Goldman analysts wrote in the report dated May 5.

A report yesterday showed U.S. service industries expanded in April, signaling higher energy use. The Institute for Supply Management said its index of non-manufacturing businesses, which make up almost 90 percent of the economy, grew for the first time since December. China is increasing refining capacity and boosting imports to meet rising demand for the Olympic Games.

U.S. gasoline demand typically climbs going into the summer season when Americans take to the highways for vacations. The peak-consumption period lasts from the Memorial Day weekend in late May to Labor Day in early September. Monthly fuel sales were the highest during August in five of the last six years, according to data from the Department of Energy.

China Consumption

China, the world's fastest-growing major economy, has more than doubled oil use since New York crude oil dropped to this decade's low of $16.70 a barrel on Nov. 19, 2001. Record prices have failed to stem rising consumption in developing nations, with demand led by China, India and the Middle East.

Price forecasts for spot U.S. benchmark West Texas Intermediate crude oil for 2008 to 2011 were revised higher by Goldman. The 2008 price estimate was raised to $108 a barrel from $96, the 2009 forecast to $110 from $105, and 2010 to 2011 estimates are projected at $120 from $110, the analysts said, citing slowing supply growth in Mexico and Russia, and low spare production capacity in OPEC.

Oil has also rallied amid a dispute between the U.S. and Iran regarding the Persian Gulf oil producer's plan to develop nuclear energy.

In Nigeria, Africa's biggest oil exporter, militants have attacked oil installations and kidnapped workers since the beginning of 2006, forcing Royal Dutch Shell Plc to halt output.

Venezuela Slump

In Venezuela, production has slumped to about 2.34 million barrels a day from almost 3 million barrels a day in 2002, according to Bloomberg's estimates, before President Hugo Chavez fired almost 20,000 workers who had closed the state oil company in an attempt to overthrow the government.

Iraq's oil production has yet to reach levels attained before the U.S.-led invasion of 2003 as the country struggles with sectarian fighting and attacks on its energy infrastructure.

Mexico's production has fallen below 3 million barrels a day since October as Petroleos Mexicanos, the state-owned oil company, failed to compensate for a 30 percent drop at Cantarell, its largest field, which accounts for 40 percent of output.

``There are supply constraints with many producers, especially from non-OPEC struggling to find new reserves and China and Middle East demand keeps growing,'' said Victor Shum, senior principal at energy consultant Purvin & Gertz Inc. in Singapore. ``The fundamentals are prompting investors to get into oil in a big way and all that points to higher prices.''

OPEC Capacity

Spare production capacity of the Organization of Petroleum Exporting Countries is low and the group's exports may fall because of ``lackluster'' supply growth and rising domestic consumption in member countries, the Goldman analysts said.

``Non-OPEC supply is struggling to grow, with notable declines being seen in Mexico and Russia showing signs of rolling over following an extended period of rapid growth,'' said the analysts from Goldman, the world's biggest securities firm by market value.

Prices are also poised to gain as major oil-exporting countries restrict foreign investments, limiting supply growth, while demand from developing countries, or ``non-OECD'' nations is rising on economic expansion and power shortages, prompting higher demand for gasoil and fuel oil, the Goldman analysts said.

Crude oil for June delivery was trading at $120.47 a barrel, up 50 cents, at 8:42 a.m. in London in after-hours trading on the New York Mercantile Exchange. Yesterday, futures closed 3.1 percent up at $119.97 a barrel, the highest closing price since trading began in 1983.

`Super-Spike'

``The core of our super-spike view has been that a lack of adequate supply growth coupled with price-insulated non-OECD demand growth'' is leading to higher prices, the analysts said. That could result in a ``sharp correction in oil demand,'' the Goldman analysts said.

Crude oil's increase above $100 a barrel was partly because of the dollar's decline against the euro, which boosted oil prices because it made commodities cheaper for buyers outside the U.S. and attracted investors as a hedge against inflation. Oil in New York touched $100 a barrel on Jan. 2.

The U.S. currency has declined 5.4 percent against the euro so far this year, and 11 percent last year.

Members of OPEC, which supplies about 40 percent of the world's oil, have said supplies are adequate and blamed speculators for pushing prices up to records. The producer group won't consider raising output before it meets in September as the market is well supplied, Qatari Oil Minister Abdullah al-Attiyah said on May 2.

There's a fundamental misperception that so-called speculators are driving prices to unjustified levels, the Goldman analysts said. ``Unfortunately, we do not think the energy crisis will be solved by finding and punishing the big bad speculator.''

Commodity investors, the Goldman analysts wrote, are ``helping to solve the energy crisis'' by speeding up the process for oil companies to spend more on energy projects and at the same time encourage efficiency.

Bloomberg.com: Worldwide

 

Technorati Tags: $200 Oil,$100 Oil,Peak Oil

Scotland's Oil-Are we going back to the 1970's ?

Some of you may know that I am Scottish and still live in Scotland which is why today's post is of particular interest and relevance to me. It is not often that Scotland gets a mention in terms of the Global Economy but today we have been all over the news.

The reason for this is that  oil workers at the Grangemouth oil refinery in Scotland are going on a two day strike starting on Sunday. The dispute is not about pay so much as pensions. The Wall Street Journal reports

It reminds me of when I was much younger and the last time that Labour was in power in the UK-we had the so called "Winter of Discontent" and the Miners and Dustbin Men Strikes.

“It was the decade of strikes, electricity shortages and piles of rotting rubbish on the street,” recalls a BBC report.

 

I was fairly young at the time but I can remember fairly frequent power cuts and problems getting coal for the fire we used to heat my parents Central heating System.It was also the time when arguably one of the UK's most militant Union Leaders Arthur Scargill head of the National Union of Mineworkers came to prominence.

Then in ‘73 the oil crisis broke. Arab OPEC members were outraged at the West’s support for Israel in the Yom Kippur war . They ceased  shipments of oil to the US and Western Europe. At the same time all of OPEC decided to increase its prices following earlier failed negotiations with the “seven sisters” – the seven biggest Western oil companies at the time.

The result of this action was a damaging blow to the heart of the oil-dependent industrialised world. The price of crude went up fourfold (to $12!) and sent Britain’s already troubled economy into a tailspin. Growth stalled and inflation rose from 5% in 1970 to a high of almost  27%  by August 1975. From a low of 5% in 1971, interest rates soon rose into double digits and hit 15% by 1976.

It is spookily similar to what we are seeing today history may not exactly repeat itself, but  today oil’s and food prices have been shooting up and workers  industrial action is once again making the news.

 

The question I guess is why is some relatively small refinery in Scotland making the news anyway? Well it is the receiving end of the major artery in the North Sea oil pipeline network. An artery that stretches from Grangemouth, south of Edinburgh, at one end to the Forties oil field over 200 miles away out in the North Sea at the other.

 

This pipeline transports crude from around 70 oil fields in the North Sea, amounting to over 40% of the UK’s entire crude production . It means BP -(BP-LSE) may have to close the pipe, with costing approx £50m per day ,the strike may only be for two days but it will take a week to boot up the refinery again afterwards.

So after more than three decades, with another Labour Government in power oil prices are high, food prices are going up and now, strikes are back. In the ‘70s the food/fuel double whammy led to stagflation . Deflation in the housing market forces consumers to tighten their belts and their resultant lower spending crimps growth.

So not only does it look like the UK is heading down the path of the US but the Global oil situation that I discussed in an earlier post this week- Has Oil Peaked ? is of severe enough dimensions that a 2 day strike in a refinery in the East Coast of Scotland merits Global headlines on the likes of Bloomberg- U.K. Braces for Fuel Cuts and CNBC Pipeline Strike

Break out the Candles-there may be trouble ahead !!

 

Best Wishes

 

Alan

Technorati Tags: Oil,Gas,North Sea,BP,Grangemouth Refinery

Investing in Emerging Markets-From Russia with Love ?

Vladimir Putin has taken leave of office and is being "replaced" by Dmitry Medvedev.Despite what some may think in the West ,Putin is extremely popular in Russia.During his premiership Russia has had a remarkable economic transformation . Since the early nineties the Russian Economy has been growing at a remarkable rate of 8% per annum.

Most of this growth has been down to the massive reserves of Natural resources that it can draw on particularly Oil, Gas and Precious Metals.The demand for these Natural resources from the emerging countries such as China and India has fuelled a boom that has seen a thriving middle class developing in Russia.

Like all middle classes these Russians are splashing out on cars, holidays and electronic goods. There is no doubt that some people may have concerns about investing in Russia, we can all remember when the Russian government was seizing power of Yukos and we were hearing stories of the "Red Mafia" running wild.However those who have invested in Russia in the past few years have seen some serious returns.

Russia is amongst the cheapest of the emerging market economies, it has huge resources of natural commodities that the world is crying out for and importantly at the moment has little or no exposure to the credit crisis that is impacting on a number of the rest of the worlds major economies. Some people may not like Vladimir Putin but you cannot fault what he has achieved in the economy.

 

The Case for Investing

The case for investing in Russia is based mainly on energy.It has vast oil reserves in its Western States and a third of the Worlds gas reserves sit in Siberia, this makes Russia  by far the worlds biggest gas exporter and producer. On top of this its neighbours have an increasing reliance on buying from Russia. Over 20% of the EU's natural gas comes from Russia.

The current record prices for oil means that the Kremlin is generating a fortune  in taxes that it has levied on the oil producers. It is estimated that Russia takes in over 80% of every dollar that the price of oil increases at the current levels.Learning from the past where they squandered the wealth that these Natural Resources generated Russia has created its own Sovereign Wealth Fund which is known as the Stabilisation Fund.The current estimates are that this fund has something in the region of $150bn.Russia also must be the  envy of many economists and politicians in the west in that it is estimated to have a budget surplus of 5-6% of GDP.

 

Downside Risks

As with all things where there is the potential of high reward there is attached risk, there is no doubt that there are risks associated with investing in Russia.State ownership has always meant that investment levels tend to lag behind what you would expect from private ownership.This is certainly the case in Russia, the limited investment in the Siberian Oil fields has seen an impact over the years in the levels of production growth.In the late 90's estimates were that production growth was around 10% per annum, the estimates now are that this has dropped to around 1%.

The picture with gas however is more rosy the Kremlin has been very active encouraging     ( some would say bullying) big Gas companies such as BP into investing in infrastructure in Central Asia.Putin has also got agreement from countries in the Caspian Region which allow Russia to get access to the reserves in the area for a fraction of what they are worth to the West so when selling these on to countries in the EU Russia is guaranteed a tidy mark-up.

One of the other potential downsides for to consider for the future  is infrastructure, since the collapse of the Soviet Union there has been  a major decline in the maintenance of Russia infrastructure, transport networks are very underdeveloped and this will have an impact on its competitiveness if plans are not soon put in place to invest in the road and rail network as well as the oil and gas pipelines.

The Russian government has recognised this and plans to throw around $1trn at the problem. The Kremlin has committed around $200bn with the rest coming from the private sector.

 

 

 

What to Buy ?

In my next post I will look at some of the ways and companies that could do well on the back of the continued boom in Russia .

 

 

Best Wishes

 

Alan

 

Technorati Tags: Invest in Russia,Oil,Natural gas,Resource Stocks,Commodities

Stocks decline after record Rise yesterday-Gold moving towards $1000

As I mentioned in my earlier post, I really don't feel that yesterdays rise was anything other than a massage upwards based on the Fed's announcement of a $200 Billion injection to improve liquidity.Today after rising at the open we worked our way back to end up with declines across the board.

The Dow Jones industrial average (INDU) lost 0.4%, the broader Standard & Poor's 500 (SPX) index lost 0.9% and the Nasdaq composite (COMP) lost 0.5%.

 

The announcement of the injection of capital from the Fed sparked a short covering rally but today we returned to concerns about what the economy is doing .The Retail Sales numbers are due out on Thursday and they will be closely watched to see what consumers are doing, if we see further declines in retails sales then it will likely spark another moving lower of the indices.

 

Oil hit an all time high above $110 a barrel before closing just below that, I can well remember the raised eyebrows when Goldman Sachs forecast $100 by 2009 in July 2007. looks like they were dead wrong and we got there a lot sooner !!

 

For me Commodities are still the place to be at least in the medium term, sure we will see pullbacks, some of them vicious but I do not see them being a bad investment over a 2-3 yr horizon.Gold was up again at $985 and I don't think it will take much for us to see $1000 in the next couple of weeks.

 

Best Wishes

 

 

Alan

 

 

Technorati Tags: $100 Oil,$1000 Gold,Gold,Fed,INDU,SPX,COMP,Nasdaq,Trading

Commodities -How to invest without using Futures or Leverage

Technorati Tags: Commodities,Corn,DBA,Agricultural Commodities,Jim Rogers Investing,Gold,India,Oil,Powershares,Silver,Soybeans,Wheat

In the last month the volatility in the stock market has been greater than it has been for some time, we have seen three figure up and down days regularly.  In an environment such as this it is easy to understand why some people lose sight of the macro environment.  If we look at what is actually happening in the world then it becomes a bit more obvious the the areas we could consider investing in.  One investment area that has been consistently on the up over the last few years is commodities.

 

Most commodities have performed extremely well over the last few years, the obvious ones like the precious metals we are fully aware of, some of the less well known is commodities are also doing extremely well.  The question is can we take advantage of these also. For many years I traded commodity futures this is definitely not a market for the fainthearted, but until recently was the only way that most people could invest in things such as Corn, Wheat, Cotton and Coffee. In the last little while however ETF's that invest in these commodities have become available.  It is now possible to buy, ETF's that follow the price of individual commodities such as the ones I have mentioned earlier, in fact ETFS securities in London allow you to buy ETF's that track pretty much any commodity that is traded on the futures exchanges including things such as Live Cattle and Pork Bellies.

With the increasing affluence in countries such as India and China we are seeing unprecedented command for all commodities, not just the Base metals for construction and infrastructure but foodstuffs such as sugar , and wheat.The demands being placed on these crops are such that we are starting to experience real pricing pressure on a lot of our staple foodstuffs.This pressure is unlikely to go away and in fact is likely to increase as these markets demand more and more of the types of food we eat and take fro granted in the west e.g. Chocolate, Refined sugar products breakfast cereals etc.An other pressure on crops such as corn will be the increased demand for meat and poultry, it takes a lot of corn to feed livestock and as demand for meat products increases then there will be a subsequent demand for feed for them.

One of the best performing ETF's this year is the Powershares Agriculture ETF (DBA ) it is up around 30% this year already

 

 

 

 

 

 

This trend is likely to continue for a good while yet as the demand for agricultural commodities is far outweighing the supply, I recently bought the DBA again(the Green B on the chart) and intend to hold it for the longer term.The other ETF's that I like are in Cotton (CTN) Sugar (SUGA) and Coffee (COFF). Coffee and Sugar have run up quite fast of late so I am waiting for a pullback to enter these but have recently added the cotton ETF as I think we may see Cotton breaking out sometime soon.

I will talk in a bit more detail about some of the other ETF's that are available in Oil etc in a subsequent posting, but if you are not too keen on trying to pick an individual commodity there are some good baskets that you can look at DBA is one as is AIGG (Grains) AIGS (Soft's-Sugar, Cocoa etc). Another very interesting basket to look at is the Rogers Commodity Index, which is a basket of commodities that tracks picks from Jim Rogers of Quantum Fund fame, Jim has been singing the praises of commodities for many years now and as in the past has proved to be very accurate in predicting Macro trends to invest in.The table below outlines what is contained in the RJI Index and the percentages of each commodity it holds.

 

 

 

This will give you a broad exposure to pretty much all commodities and is a great way to gain exposure to these markets, Jim reckons we are still only midway through this commodity bull cycle and sees another 5+ years or so before we risk reaching a top.This could be one to add to your portfolio and top up  pullbacks. Certainly I am of view that in the 2-3 years most if not all commodities are likely to definitely outperform the stock markets and also probably prove less volatile. I currently am holding a lot in the commodity sector and will be adding to my holdings on weakness.

 

If you want to learn more about Jim Rogers views on the markets I highly recommend any of these books he has written, they are not only highly informative but also a good and easy read.

 

THE ULTIMATE INVESTOR'S ROAD TRIP: ADVENTURE CAPITALIST.: Books: Jim. Rogers

 

Investment Biker: Books: Jim Rogers

  

 

Hot Commodities: How Anyone Can Invest Profitably in the World's Best Market: Books: Jim Rogers

 

A Bull in China: Books: J. Rogers

 

 

  

Good Trading

 

Alan

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Performance Curve Updates

Posted above are the latest Performance Curves for my Pension Plans.The top graph is the GBP Portfolio and the lower one is the US$ Portfolio, pleasingly both have shown improvements this month particularly the GBP portfolio with a 4% gain on the month bringing the overall performance from the start to 40% return. The US Portfolio was also up but only slightly up about 0.5% for the month.The US portfolio is showing a 15% increase since inception.The US portfolio suffered a bit this month as the LEAP options on Microsoft (MSFT) gave back some of their gains.I am expecting that the US portfolio will shine when the Commodity and Natural Resource stocks do well as it is fairly heavily weighted in that direction. If we continue to see gains in Crude Oil and Precious Metals then the holdings in companies such as Goldcorp (NYSE:GG), Silver Wheaton (SLW-T) and the Oil and Equipment Services ETF (NYSE : IEZ) will generate some good returns. Silver and Gold seem to be looking to go higher here , although we could see some consolidation or even a pullback before we see Gold over $700 and Silver over $14.

Oil has been flirting with $60 all week and it is still uncertain which way it will go, weather and increasing Geopolitical tensions are playing their part and if these ease then we may see another pull back to the $55 area or below.However I firmly believe that Oil at those prices is a good buying opportunity as I do not believe these low levels will be sustainable.

It is interesting to note that once they got used to the revenue with oil at $60+ a barrel the OPEC Cartel seem very reluctant to see oil back down at the $50 mark.I imagine every time we see any pullbacks to those levels we will hear the jawboning from the Oil rich countries about production cuts etc, which will serve to put a floor under the price.

In my next article I am going to look at the part Dividends and High Yielding Assets can and should play in your Portfolio.

Best Wishes

Alan

Water Water everywhere..............or is there ? How to invest in Water or Blue Gold

Some of you may have heard of T. Boone Pickens, for those of you that have not he is one of the worlds most famous Oil and Gas Billionaires. He founded a company called Mesa Petroleum with $2,500 and turned it into a billion-dollar company.So with oil reportedly running out and prices still way higher than they have been for years( we are currently thinking oil has become incredibly cheap at $50 a barrel-it was only in Oct 2004 that oil hit $50 for the first time and that was a record high!!!) then you would think that this 78 yr old billionaire would be very happy to sit back and enjoy the wealth brought on by one of the worlds most important Natural resources getting more and more scarce.It may surprise you then to know that he has been very busy buying up as many rights as he can to an even scarcer resource that we all tend to take for granted.........WATER.

He has set up a new company.Mesa Water and is investing heavily in water rights in Texas, he plans to pump the water to other areas in Texas such as San Antonio, Dallas-Fort Worth to name but a few.........for a price of course.

What this tells us is that the BIGGEST natural resource issue we will face in the coming years is access to fresh water.Our planet is awash with water, unfortunately a lot of it is salt water and with the increasing industrialization taking place in countries like India and China, the water resources they have(which were already fairly scarce) are becoming polluted and unusable not only for drinking but for use on crops and farmland.

This means that companies who own large amounts of water or those who are involved in desalination or water infrastructure could do very well in the years to come.Currently we are starting to see water and water related stocks hitting the mainstream press but I think we are still likely to be in ahead of the crowd if we move quickly.

I have had a holding in VEOLIA ENVIRONNEMENT -ADR, (VE) which provides environmental services to municipalities and corporations worldwide. for the past 6 months or so and in that time it has risen 32% or 60% annualised.I think in the mid term there is still plenty of upside for VE as it is I believe extremely undervalued given its prospects.

Another possibility is PICO HOLDINGS INC, (PICO) operates in five industry segments: property and casualty insurance; surface, water, geothermal and mineral rights; medical malpractice liability insurance; portfolio investing; and other.

PICO is slightly more diversified but nonetheless is well positioned to take advantage of the worlds increasing need for water.

As ever do your research, these stocks should not be too volatile so I would be comfortable placing a 15-20% stop loss on any purchase and be prepared to hold them for a few years.

Best Wishes

Alan

Tags: VEOLIA, VE, PICO, Investing in Water shares, Oil, Gas, Natural Resources

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Outlook for Gold and Oil-Should we buy or bail ?

Sorry there has not been a post for a few days I have been away most of the week and was not able to access my PC. I wanted to have a quick look at Oil and also Gold.Both of these are some of the most well known commodities and if played correctly can give some real long term upsides to a portfolio. Those of you who have visited before will know that I am a commodity bull and am heavily invested in Natural Resources and the Precious Metals.Oil and Gold however have not had the most auspicious starts to 2007 with Gold bobbing up and down in a fairly narrow range and Oil being hammered, down 13% in January.Is this the end of the commodities bull run ? Absolutely not, in my view. I think we are seeing some tremendous bargains and opportunities for those of you looking for some medium term 2-3 yrs investment for your portfolio's.

Let's look at Oil-there are a no of reasons I am still bullish on oil namely :

1. Growth in economies such as India and China-economic growth in these countries will drive the need for oil for a great many years.When you factor in we are not really discovering much more and the developed countries such as the US and in Europe are using more not less then that can only mean one thing. Increased demand and limited supply= higher prices


2. Institutional Investors, the big hedge funds particularly have been dumping oil contracts all of this month. These guys are trend and momentum traders and they all rush for the exits at once-this exacerbates any movement up or down and we have to factor this in to the big moves we see these days.


3. Warm Weather in the US-particularly in the North East of the Country-the minute we get the first dump of snow and temperatures drop in New York and Boston we should see Oil start to climb


4. Geopolitical tensions, Iran and North Korea are still at the sabre rattling and other oil hotspots like Venezuelan and Nigeria are anything but stable. I do not think it will be too long before we see some geopolitical confrontations rearing their heads again.

One of the best values in the Oil sector just now are I believe the Oil drilling stocks, this sector is also ripe for take overs or mergers.

Currently it is almost impossible to get a drilling rig in the Gulf of Mexico or anywhere else-and if you can get one then rental fees are sky high.The best way to play the sector is to look at the iShares Dow Jones Oil Equipment and Services ETF (NYSE-IEZ).

This ETF gives you a broad exposure to the major drillers like Baker Hughes (BHI), Schlumberger and Halliburton.If you are looking for a higher risk but potentially higher reward play then cast your eye over the Russian Giant Lukoil (OTC-LUKOY).There may still be some downside in oil and the oil sectors but for me the upside potential far outweighs the downside risk at this stage of the game.

In terms of Gold, the main driver of the precious metals still remains supply and demand, supplies of Gold are tight and with the increased geopolitical tensions it may also have some safe haven status as well.

If you are looking for an individual company Goldcorp (NYSE:GG) is still one of my favorite plays or the iShares Comex Gold Trust (Amex-IAU) will track the gold price.

In the short term expect some volatility in these sectors but the mid to long term outlook for them both is in my opinion very positive indeed.

Best Wishes and Good Trading

RT

Tags: Gold, Oil, ETF, BHI, SLB, Goldcorp

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