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$100 OIL?

$100 OIL?

OIL

A couple of years ago I predicted that oil would go to $55 per barrel, and people laughed. After the laughter died down, oil hit that level in October 2004. A pull back then ensued for a few months, and currently, as the end of the winter heating season is approaching, oil is once again at $53 per barrel. I have heard that in the last few days the Saudis have realized that demand from India and China, and less supply for export from Russia, is a reality (I guess they were a little slow on the uptake). So now they are saying oil will stay in the $40 plus region.

To further compound the problem:

1. The oil producers are tired of getting paid in declining dollars. Therefore, their incentive to raise prices is growing.
2. Venezuela is selling its U.S. based heavy oil refineries, and signing contracts with India, China and others to sell them their oil production. Historically, they have been a big seller to the U.S. In the last few months, President Chavez of Venezuela has made it abundantly clear that he does not like the U.S. and does not want to be dependent on the U.S. for anything. Hence, they are making arrangements to sell their oil to others.
3. The Mid-East situation appears to be getting messier all the time.

I have long thought that oil would approach $100 per barrel. I did not want to make a pronouncement that would be sure to garner me a lot of angry emails and letters from people denouncing my view (informing the uninformed is time consuming, and they seldom listen, even when they claim that they want to hear your point of view). People are beginning to see the handwriting on the wall, and it appears that the handwriting is becoming more visible. Thus, the public is willing to believe that oil can stay at high prices. So now I am going to say it.

Oil prices will approach $100 per barrel in coming years. This does not mean that oil will not fall from its current price. It may fall and stay down for months, but oil prices will move up in the next several years and reach $100 per barrel.

NATURAL GAS AND OIL

Natural gas prices are nearing their seasonal peak. Natural gas prices often peak in the early spring as the weather warms up. Gas is a local commodity, and is seldom transported from one side of the world to another. In late summer and early fall, natural gas prices often rise in expectation of the oncoming winter.

Oil, on the other hand, is a global commodity. It is commonly transported throughout the globe. Historically, oil stocks have moved down in the spring and early summer along with natural gas stocks. There is no news of cold snaps or a lack of heating oil, so there is little incentive to buy based on near term news.

We favor energy stocks, as we have for years. Oil prices will fluctuate, and often in the period between March and September, energy stocks fall in price, creating a buying opportunity for the informed.

We hold energy stocks and we may take a few profits now that March has arrived, but we plan to do plenty of buying in the summer if prices fall. We have a well-researched list of attractive Canadian, European and U.S. energy companies, which we would like to buy if prices fall.

We are busy visiting managements, attending conferences and trying to meet people in the industry to better understand where the opportunities lie. A few hints; we like companies, which can grow through new discoveries, or through the extension of existing fields. We prefer companies which have a track record of reserve additions, which are a result of exploratory and development drilling, not the result of acquisitions.

CHARLEY MAXWELL; DEAN OF OIL STOCK ANALYSTS

Charles Maxwell has been an oil analyst for 50 years and the following is a synopsis of his comments. His analysis is based on common sense.

1. U.S. oil production peaked in 1970, and now non-OPEC world production may peak as early as 2010.

2. World demand is growing about 2% a year, but new discoveries are not even replacing the amount of energy consumed each year. The surge in the price of oil over the past two years is just an early chapter in a story that will unfold over decades.

3. Within 10 years, gasoline could sell for $8 per gallon in 2005 dollars.

4. The price of electricity is expected to soar. The effect of these higher costs will have the following effects on everyday life in decades to come:
a) Cars will be smaller
b) Alternative fuels will be more widely used
c) Homes will be much more energy efficient
d) Cocooning will come on strong (more leisure time spent closer to home)
e) Cities will prosper (they are more energy efficient than suburban or rural living)

WORLD STOCK MARKETS

Financial transparency, honesty in communication, and respect for investors are all in short supply in China. Investors do not trust the veracity of Chinese companies, and the price of Chinese stocks reflects this situation. Chinese stocks have been declining since 2001. In the last year, Chinese stocks are down 20% while world stocks are up slightly. The Chinese are good at many things. Let us hope that they learn how to treat investors in their companies with respect. Until they do, most global investors will not invest in Chinese companies. As we have mentioned in the past, we only buy Chinese companies that trade in the West where they are required to make financial disclosures that are not customary in China. Even in this case, we maintain a high level of vigilance.

THE INTERNET BUBBLE

This week is the five-year anniversary of the peak of the Internet boom. It was five years ago that mass insanity culminated in a valuation of 5,000 on the Nasdaq, which today is at 2,100. This is a decline of close to 60% in five years for an index heavily laden with high technology companies. Clearly, investors were unrealistic and naive about the potential for many companies of the era. However, the market did its job, which is to separate the unsophisticated from their investments, and to reward the well informed and the experienced.

Unfortunately, another bubble of large proportions is developing in some world real estate markets. Interest rates may be rising worldwide. How can real estate continue to appreciate at rapid rates?

PRECIOUS METALS AND CURRENCIES

The insanity is not stopping with regard to budget deficits in the U.S. and elsewhere. This means higher currency prices versus the U.S. dollar. We expect the dollar to resume its decline in the not too distant future. When the dollar declines, we can be sure that gold will rise. We continue to use price dips to add to our gold and currency positions, and we think that our patient approach will be well rewarded.

SUMMARY

Thus far, 2005 is working out well for our clients. Strong energy stocks and good appreciation in small growth companies in the U.S. and abroad have provided profits. We know from long experience that all rises are punctuated with periodic corrections. We believe that energy stocks may move sideways to lower for a few weeks or months before resuming their long-term climb. We will buy during the periods of decline.

Gold and currencies have had a correction for the past few months. They both peaked late in 2004. Soon they will begin to rise again. We are buying on dips for the long term. By the way, we agree with Jim Sinclair and Ken Adams who say that gold will move to $570 in the not too distant future, from there they see a move to much higher prices.

Small companies in the developed and non-developed Asian countries, who supply China and India with components, raw materials and energy, will continue to grow steadily as demand from both India and China boosts their profits.

India has more financial transparency than China, but is not as friendly to foreign investment as China. Remnants of the Fabian socialist past still haunt investors, and make dealing with the bureaucracy a bewildering and frustrating process. India will provide more investment gains than China, but investors must tread very carefully.