OIL – The Outlook

The long-term outlook for oil prices is bullish, but the road ahead will be bumpy.
Oil prices are affected by a multitude of conflicting forces which include the outlook for the global economy, Chinese demand for commodities, the ability/desire of oil producers to increase production, alternative sources of energy, etc. A correction in oil prices cannot be ruled out given the sharp gains in recent months, especially if global economic activity slows. However, the long-term trend in oil prices is still up, given the structural upturn in energy demand.

A New Era Of High Oil Prices

The industrialisation of China is positive for oil prices over the long term.
Chinese oil consumption per capita is still a fraction of that in more developed economies, and thus has considerable upside potential. China uses only two barrels of oil a year per head of population compared with 25 in the U.S. and 17 in Korea. If China were to experience an acceleration in oil consumption similar to Korea and Japan, it would be consistent with Chinese per capita oil consumption at around eight barrels per year by 2015. That would increase global consumption by 24 million barrels a day. Producers do not have plans to meet such an increase and, hence, the rush to find more energy will accelerate.

A New Era Of High Oil Prices

The market faces major constraints in terms of refining capacity.
Last year, the global refinery industry operated at 87% of capacity. Over the previous 20 years, refining capacity increased by only 15%, compared to a 33% rise in demand. On current trends, the lack of refinery capacity will become the key constraint on demand, and it will be up to prices to achieve a balance in the market (i.e. prices will have to rise to the point where demand is choked off). BCA’s simulation for refinery utilisation suggests that the utilisation rate could move above 90% within two years. Bottom line: There is a global rush to find new sources of energy and to increase refinery capacity. Hence, long-term investors should maintain overweight positions in energy and related stocks.

The Message From Gold

The breakout in gold is more a symptom of ample liquidity than of increased inflation concerns.
The gold price has reached the highest level since early 1988. The upside breakout is especially impressive given that the dollar has been firm, with the price rising in terms of all major currencies. Rising inflation expectations do not appear to be the main explanation, as bond yields have stayed broadly flat in the U.S. and have trended lower in the euro zone. More plausibly, gold’s rise indicates that there is still plenty of liquidity around. Meanwhile, the ratio of gold to industrial commodities remains in its trading range. An upside breakout in this ratio would represent a bullish signal for bullion prices.

And finally……..

BUSH REPORTED DEAD