Tuesday, September 2, 2008

Some thoughts on Oil prices

Since the beginning of the decline of oil prices, commodity prices have been on the downtrend as well. Even the “commodity currencies” NZ dollars and Aussie wasn’t spared. It now seems apparent now that there was no real demand for oil afterall. Those “experts” who have predicted that oil prices will reach US$200 by year end are probably the same people who have speculated on oil futures, at the expense of world economy.

The worst hits were probably airline stocks, many even incurring real losses, compliments from the oil speculators.

I remember discussing with some investors (colleagues) that the oil bubble will not last, last year. I was saying that there are plenty of alternative energy available as substitutes. For instance, solar energy, hydro energy, palm oil, coal, nuclear fusion and fission, wind energy, natural gas etc, just to name a few. If oil prices were to really run up to an unsustainable point, all countries will cut back on energy consumption and rely on alternative energies instead.

I also pointed out that if US (world largest consumption of oil) were to enter a recession (quite likely last year), it will cut back on energy consumption and thus reducing real oil demand. In fact, Warren Buffet has remarked that US was already in recession at that point of time but it was not reflected in GDP because of an increased in US population. Americans are actually worse off by the day.

Also, it does not seem logical that with global economy slowing down, oil prices are doubling at the same time. It is making a mockery out of the basic supply and demand theory.

Even MM Lee came forward and attempted to prick the oil bubble by “predicting” that oil will never exceed US$120. Before we know it, oil went past the US$120 mark and peaked at $148 before its descent. He also did not gain much market support when he wrote on the Asia decoupling theory in Business Times few months back.

Of course I was proved wrong again and again for months, until it seems that oil prices will never come down. Demand seems real. Even I begin questioning my contrasting perspective of steep and speculative uptrend of oil prices.

The oil experts argued that there have been no major oil fields discovered for the past 50 years and the cost of extracting alternative energy will take more time to curb the current energy demand. Besides, India and China accelerated growth will only increase oil demand and prices.

Suddenly, many papers were written by experts to “explain” why oil can only go up.

“Experts” wrote with great zeal on investment strategies to ride the oil boom. SPC went up to $9 (last traded at $5.30); Wilmar went up to $5.70 (last traded $3.68); Golden Agriculture went up to $1.15 (last traded $0.595), while SIA plunged from $20 to $13.80. Not many (myself included) ever dared to buy for its hefty $0.80 dividends when it was trading at $14.

Now, the “experts” are predicting that oil will drop below $80. Have they sold put options this time to ride the oil decline?

I believe oil will resume its uptrend for sure. There is no doubt about it if we look at the 50 year chart. With limited supply and unlimited demand, we should be prepared for high oil prices. However, for oil to double its price within 1 year can only be due to speculation. A more reasonable uptrend of oil price will be 10% per annum, in my opinion.

I do hope the experts are right this time as the stock markets will probably soar if oil prices fall below US$100.

It may be a good time to pick up some gold if it really falls below US$80 as well.

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