Despite severe economic turmoil, demand for oil is rising significantly—in fact, it will land somewhere in the range of $150 to $157, according to Roger Wiegand, editor of Trader Tracks.
A native of Michigan, Roger has had an interest in precious metals and futures since the commodity rallies of the late 1970s and early 1980s. His background in a 25-year real estate development and construction career specialized in forward planning, consulting, and using creative skills for conceptual project thinking. His present work is focused on the precious metals, currency, energy and interest rate markets for trading on the primary American exchanges. Experience in land, development and base material projects has evolved into consulting for mining companies and analyzing those markets. He has developed longer-term ideas for finance and mining marketing doing work on behalf of private and public mining companies. Roger’s consulting work is to focus on concepts and “big picture” forward planning for mining companies. His newsletters utilize the global news, and his personal research and knowledge for expressing personal trading ideas.
In this exclusive interview with The Energy Report, Wiegand takes a close look at the untamed commodities bull and names some of his favorite buys.
The Energy Report: How does you think oil will play out in current economic scenario?
Roger Wiegand: The big sell-off during the past month or two was triggered when the funds bailed out. Roughly 50% of the CRB—the commodities index—is in oil. When oil moves, it moves the index. The sell-off brought oil down from a high of $147 to roughly $90. It bounced back up to $108 to $110; $108.50 is a good support and resistance level for oil today. The next price up should be $112.50, then $122.50, followed by a couple of more increases. I think the top is going to be $150 to $157. That was our forecast.
Since our initial discussion, oil prices dropped further into the $80s on credit crisis-related problems. Analysts and traders view this recessionary onset as bearish for oil prices as business and commerce worldwide slows down. While this shorter term selling is cause for concern, we still expect crude oil to come back with a rush when the stock market is propped and recovers for the elections. Since this latest selling event, OPEC had an emergency meeting to discuss reducing production to prop prices. In our view they will do it.
For the past two to three weeks, Goldman Sachs has had two prices on oil. The general analyst group, which covers all the markets, says oil will top out at $140. But the commodities division—and these guys are the smartest of the group—is holding fast to their $149 price by the end of the year. This price doesn’t take into account any potential problems in the Middle East, or any hurricanes—either of which could affect oil prices between now and the end of December. So these analysts are forecasting a price that’s very close to my forecast, of $150 to $157 by the end of 2008.
TER: That’s quite a move up from where we are now.
RW: It is. A lot of that increase is inflation related, and lot of it has to do with diminishing supply. We’re currently running at a shortfall of about two million barrels a day worldwide. Demand has fallen somewhat because of high gasoline prices in the U.S., but those prices are starting to come down a bit. The supply/demand picture has been further confused by hurricane Gustav. When Gustav shut down a number of oil refineries and natural gas facilities, oil prices dropped because refineries couldn’t buy oil from the oil producers. At the same time, hedge funds were getting out of oil. All of this contributed to lower prices. What happens next? Inflation is going to be big next year, not only in the U.S., but also worldwide—and that will lead to higher oil prices.
TER: How high?
RW: Charlie Maxwell, in Barron’s, says $300 oil in about five years—that’s the long view. Inflation adjusted, he’s probably right. I think we’re only about halfway into the commodity bull market. Despite the credit problems in the U.S., Asia is not going to be economically buried to the extent that we are. And that’s a continuous growing market for gas and oil. Even among the oil and gas exporting nations in the Middle East, there are countries like Iran that oddly enough have no refining capability. They have to import all their gasoline. Iran is trying to solve that problem by building two new refineries. China’s building more domestically. Kuwait offered to build a $6 billion refinery in the U.S. and we foolishly declined. This complex is now underway in China.
TER: We’re in a recession right now, yet that doesn’t seem to be affecting demand.
RW: You would think that the demand worldwide for energy products would be off in a recession. However, the demand growth side in Asia and India has risen significantly. The net result is that demand is not only holding; it’s growing. On top of this growth, we have a shortage of refining capacity. Using the barrel model set out by the CEO of Shell Oil, gasoline comes off the top of the barrel. Heating oil, diesel, and jet fuel come out of the middle, and the lower grades from on the bottom. The middle-of-the-barrel prices are holding fairly well and we see them going higher simply because of lack of refining capacity. About 35% to 40% of the gasoline coming into the U.S. is not refined here; it’s refined overseas and it comes in as a finished product on a tanker. That, to me, is an Achilles’ heel for the U.S. If we start having problems importing refined gasoline, we’ve got big trouble. So that’s a key part of the puzzle. But for now, the combination of increased demand, a shortage of refining capacity and inflation will force oil prices up.
TER: You were also intrigued with natural gas when last we spoke.
RW: We had a price drop here about 12 to 18 months ago, where natural gas really took a dive. It fell from $12.14 to $5 or $6. But we had a mild winter, the supply kept coming and it had to get back into balance. Now the balance has been achieved. The price has climbed back to $7 or $8. A very cold winter, which is in the forecast, will drive natural gas a lot higher again. And, inflation is at work here, too.
TER: Heating oil prices, especially in New England, where it’s too rocky to install gas pipe, have doubled. When you factor in inflation—increases in the cost of food, gas, and heating oil—couldn’t that push us into a depression? What happens if people just can’t afford to pay for food and heat anymore? Won’t demand for oil drop along with prices?
RW: I think prices will come down, but I don’t think they’re going to drop to the floor.
TER: If the U.S. goes into depression, how will that impact growth in countries like China and India?
RW: I think it’s going to be a disaster for those countries because much of their credit is tied to our New York banks. China’s direct sales to the U.S., which are already slowing, would fall off dramatically. And many of the products that Japan sells to the U.S. are manufactured in China—so both countries would suffer. If the U. S. sinks into a depression, the winners in the stock market are Sam’s, Wal-Mart, and McDonald’s—that’s where people will shop when they downsize their spending. However, those nations are growing markets domestically, which should help to carry them through and support commodity imports.
TER: You said earlier that continued growth in Asia would spur demand for oil. What happens if a depression in the U.S. throws China, India and others into recession? Do we still have a commodity bull market?
RW: I still think you’re going to have a commodity bull market in that case, but it’s not going to have near the strength that it had before. The critical things to watch are copper prices—because most of the copper is going to China—and crude oil. China has a big enough building-buying machine within the country to sustain ongoing growth. India may be a little more vulnerable because of its unique problems. The key point here is a China-India energy slowing not a depressive complete stop.
TER: Are you recommending any oil or tar sands, or alternative energy plays?
RW: I have one right now, Empire Energy Corporation International [OTCBB:EEGC], which I consider a wildcat deal at $.15 a share. Empire’s property is on the island of Tasmania, off Australia. This little company has some fabulous geology and, in fact, the previous owners of the property spent between $10 to $15 million doing the preliminary work. If Empire can work around some management issues, there’s backup financing waiting in the wings that can step in for help. The first well is now being drilled.
TER: Any coal companies?
RW: The coal companies, despite the fact there is a global supply shortage, are going full bore. Their prices are coming off a little bit lately but I think that has to do with the credit crisis and finance more than demand. But Peabody Energy Corp. (NYSE:BTU), Massey Energy Co. (NYSE:MEE), and two or three other large coal companies look good.
TER: What about agriculture?
RW: The corn biodiesel craze, in my opinion, was nothing more than a ploy by the government to drive up corn prices for farmers. It worked, but it’s finally going away. A lot of these plants can’t make money now. The math just doesn’t work, because of the high cost of fertilizer, seeds, and diesel fuel to run the equipment.
We’ve made a lot of money on the soybean trade early this year. We recommended small traders take their profits, which they did. They made well over 100% on the trade in just two or three months. Those with multiple positions, myself included, we said sell half and hold half, thinking we were going to get a higher price this fall. But the sell-off in the commodity funds gave us a whack and knocked our second trade leg bean prices way back. So it looks as if the second leg of our soybean trade is going to be worthless. The net outcome is that we broke even, or made a small amount, but we didn’t make the larger gain we expected. Next year I think we’ll see soybeans at $20 a bushel, which is crazy. With inflation and the demand for food and the cost of energy and fertilizer and seeds, I think that’s where it’s going. And, of course, because of the interest in bio diesel fuel, we won’t see anymore $2.50 corn. It’s now $5 or $6 and we predict $6 to $8 by the end of the year. We hit $8 in July, but the price pulled back on the credit crunch. Food prices are high, and only going to go higher.
In summary, the commodity bull market remains in play and we forecast it continues for at least another six to ten years. The structural bull market demand will not disappear especially in Asia, Russia, parts of Europe and sections of South America. Canada’s western provinces should continue to do well, along with Quebec mining. Ontario, which is tied to the U.S. with manufacturing, will undergo the most recessionary pressures.
When the credit crisis hit and those funds sold out major commodities positions they sold it all. Most of these funds were long only and internal selling was triggered as investors demanded redemption. The key point here is that not all of that money is gone but on stand-by. New reports also tell us the redemptions were not as widespread as first believed. Yes, the selling event was a cascade and sold down commodities with speed, but many funds remain invested waiting for prices to base and begin new rallies.
The U.S. dollar was the key driver component of gold and silver prices as well as the other commodities. When Europe and Asia skidded lower, the dollar stood still and those other currencies sold down around it giving the dollar the appearance of a new rally life. Risk, credit and finance are new pressures on the commodity market players, but food and energy of all kinds should continue to rise with inflation and providers of those commodities should recover and return in new bull markets.
The world has not ended. However, it certainly endured a terrible negative event. We think the sun shines tomorrow and better days are ahead for those in the correct markets.
Disclosure: Mr. Wiegand has some positions in stocks mentioned