The Case for Growing Commodity Prices

The following is a case presented to support why we should continue to see an upward investment trend in commodities and how this positive long-term trend is due largely to the supply and demand imbalances that persist in industries that produce commodities.

In addition, the market turmoil of the past two years caused new financings of commodity exploration and development projects to become next to non-existent, so these imbalances have been exacerbated.

Ultimately, the message is that the supply / demand imbalance has created a recipe for longer-term commodity price strength. It appears all the ingredients are in place for this longer-term secular theme to play out.

Using oil as an example, here are some points to consider:

• If China and India per capita consumption grows to levels similar to Mexico’s current consumption, global demand would increase by over 36 million barrels per day. This would require the equivalent of three more Saudi Arabia’s to meet this demand.
• Future oil demand will come from developing countries. For example, looking at global energy demand from 2005 through 2030, it is projected that OECD (Organisation for Economic Co-operation and Development) countries will show a 19% increase while Non-OECD countries will show an 85% increase.
• Supply constraints support ‘higher for longer’ prices in oil.
• Oil reserve decline rates are getting higher, and the costs of getting oil out of the ground are increasing (the oil sands being a good example of this).
• Even if large-scale investment resumed immediately there is a time lag before commodities can get to market, so this makes it very likely that we will see most commodity prices go higher in time.

An argument against commodities in the long-run requires a belief that the U.S. economy will implode, China and India will not grow, and the wealth effect caused by the growing middle classes in developing economies around the world will not occur.

In my humble opinion, it would be a large stretch to see all of the aforementioned scenarios not play out.

Comments

[Mad Hedge Fund Trader]

ndu Those of you searching for the “new normal” better take a close look at the China National Offshore Oil Company’s (CNOC) efforts to top Exxon Mobil’s (XOM) $4 billion bid for development rights to a giant new field off West Africa. This is only the latest chapter in a global bidding war for essential resources they, and we, need. Long gone is the day when the Standard Oil Company only needed to deliver King Saud a new Cadillac every year to assure rights to his kingdom’s oil supplies, even though it often had to be towed by teams of camels, as there was no refining capacity yet on the peninsula. Decades later, I was part of a SWAT team at Morgan Stanley whose schmoozing kept the crude flowing and the cash surpluses recycling. Having grown up in the desert near Indio, California, I was the only one in the company who actually liked caravanning out into the desert to scoop up cooked rice with my fingers off of giant brass platters, and guzzle illicit Johnny Walker Red, said to be smuggled in by a wayward member of the royal family. I never did get used to the sheep brains, though. But I digress. To the current generation of oil traders, I might as well be talking about the Pax Romana than the Pax Americana, which is now equally ancient history. The hard truth is that they are out there bidding against the new 800 pound gorilla in the market, as are others for coal, iron ore, copper, gold, silver, wheat, corn, soybeans, and myriad other essentials. If you have any doubts about China’s acquisitive determination, look at the chart below showing that the Middle Kingdom’s outbound direct investment is outstripping inbound investment for the first time. Will the Pebble Beach Golf Course next? For you and I, this means we can count on the price of everything to go up in the future, a lot. Keep food, commodity, and energy ETF’s permanently on your radar, like the PowerShares agricultural (DBA), the Rogers International Commodities (RJI), and the Oil Trust (USO). Jim Rogers, are you listening?

2009 Oct 23 11:53 AM