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Oil, Commodities Continue To Weaken - An Inflection Point?

Posted on | October 22, 2008 Time: 5:44 pm |

Looking through my recent posts, I don’t seem to have mentioned crude oil prices very much. I can’t see why as I’m studying it constantly throughout the day, more so now than ever. I’ll reiterate my earlier standing apology for any gaps in the information I provide; I will, however, use the ultimate excuse that the past month has been the most chaotic market period of my life.

But all the same, going forward if there’s something you’d like to hear about in more depth, feel free to drop a line or attach a comment. We’re all here for one reason, and that’s to get a little bit better, a little bit smarter each day…

With regards to oil, I used to be content to let oil do what it does….Que Sera Sera, or what have you. But I always knew in the back of my mind that someday it would require a bigger slice of my attention. We’re certainly there today - in addition to representing an immediate driver to Secular Portfolio Holding Petrobras, it is an almost-immediate driver of coal prices (and therefore Peabody shares) and a huge input cost for Caterpillar. And as it inexorably trickles down into gas and distillates, pretty much everyone is affected.

Where We Are Today

Crude futures are down over 5% today on the back of a weak inventory & demand report from the EIA, as well as continuing evidence of widespread demand destruction. OPEC is set to meet tomorrow and cut production by at least 1m barrels per day, but many question whether this will be enough to outweigh the dropoff in demand. OPEC would like to see prices get back above $80, and it will happen soon enough on its own. As to whether we’ll get there this year, I can’t say for sure. The EIA report is showing declines in demand for oil & gas of anywhere between 5% and 8% over 2007 levels. While any decline is a rarity, those comparison are still against peak demand levels in ‘07 and mid-single digit declines don’t signal to me that oil should be dropping more than 50% from its peak in July.

Alternative Energy Under Attack?

There’s an interesting side plot shaping up as oil continues to fall. Alternative energy technologies saw their highest levels of investment ever as oil was peaking. It all stems from the cost structure - alternative energy becomes more and more competitive as the price of readily available energy (i.e. crude) rises. There was an interesting article in the NYTimes this morning which highlighted the troubles alternative energy faces as oil becomes cheaper and cheaper. Of course, there’s also the blanket problem of access to credit, which also hampers capacity growth for alternative energy producers. The two factors combined are leading to much lower investments in the sector, especially from venture capital and investment banks.

Some folks at OPEC may be looking to repeat what happened in the early 1990’s when oil dropped so low that all the alternative energy momentum (at the time) was wiped off the boards. I doubt that OPEC would be willing to see revenues fall another 50% for that to happen, but it is a palpable fear for solar and wind energy producers looking for increased investment and subsidies to build up infrastructure and lower overall prices.

Is Today an Inflection Point?

The news and commentary flow is very, very weak today, and I actually see that as a positive. The last few bastions of the market are seeing weakness, and most pundits are claiming things like “China is faking their GDP numbers” and “There won’t be any rebound in 2009″. Now both of these could be true, but it’s the overriding pessimism that has be intrigued. I am very disappointed to see copper and the soft commodities (corn, wheat, soy) sell off again today. As I mentioned in yesterday’s posting on Freeport (FCX), unless copper can rebound strongly to close the day today, I’ll have to look at cutting my modest losses on the position. Copper last traded at $1.88…

As to the broader market, now that every economy in the world is seen as a no-growth enterprise, stock markets can be expected to discount global pessimism. It may not happen today, but we appear to be close.

Ryan Barnes

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Read more on Oil, Commodities at Wikinvest
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Category: Basic Materials, China, Crude Oil, Metals, Secular Trends Portfolio, Solar
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