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New Oil Discoveries: Another Reason to Bet Against a Secular Bull in Commodities

With the world economy “reflating,” the price of oil and other commodities has surged.  This is consistent with HS Dent’s forecast for “one last hurrah” in commodities in mid-to-late 2009.  We believe, however, that the long-term picture for oil and commodities in general is quite bearish.

Consider Kopin Tan’s comments in this week’s Barron’s:

“…the slump actually has masked the beginning of a profound, long-term  shift that will affect oil and oil stocks for years.  Thanks to a confluence of factors–a legislative push to wean the nation off foreign oil, and end to very cheap fuel, a global rush toward fuel-efficient cars, fewer people driving to work and more citizens becoming concerned about the environment — U.S. gasoline consumption might never surpass the high of the summer of 2007.”

So, in reply to the “peak oil” supply arguments from many commodity bulls (and doomsday / conspiracy theorists), Mr. Tan has suggested we may instead be looking at peak oil demand.  

Mr. Tan may be a bit too optimistic about Americans growing to love compact cars; this remains to be seen.  But we do think that he is correct about U.S. demand for energy being somewhat muted in the years to come.

Meanwhile, we read in the Financial Times this morning that India, after its recent discovery, will now be supplying much more of its own crude oil and will depend less on imports.   We should also remember that Brazil made one of the largest discoveries in decades off its Atlantic coast, and this supply will be hitting the market in the next few years.

But what about China?  Won’t Chinese demand cause the price of oil to skyrocket again?  Maybe.  But we doubt it will be sustainable.  Investors are getting increasingly worried that China is on the verge of “blowing up.”  Yes, it is a country of 1.2 billion people.  But even a country of that size can have too much infrastructure.  Is China at that point yet?  Who knows.  Chinese government statistics are notoriously unreliable.  But at some point in the next few years, we believe the investment-fueled Chinese boom will go bust — knocking out a major source of oil demand.

Bottom line:  Look for a secular bear market in commodities, not bull.

Charles Sizemore, CFA

Co-author of the recently-published Boom or Bust: Understanding and Profiting from a Changing Consumer Economy