A Long-Term Look at Oil

11/05/2004 12:00 am EST

Focus:

Harry Dent

Author, The Demographic Cliff

Harry Dent, best known for his bestsellers, The Great Boom Ahead and The Roaring 2000s, has just published his latest, The Next Great Bubble Boom . Here, the well-known optimist offers his outlook on oil and its impact on the stock market.

"Our buy target of 9,700 to 9,740 was hit in late October and investors should continue to buy on setbacks. The fact that the Dow made a slight new low, but the Nasdaq and S&P 500 held well above their August lows is another positive divergence and shows that the technology stocks are already leading this next bull market. Hence, this continues to look like the last great buying opportunity before the surprise bull market of 2005 and the next great bubble into 2009. A further confirmation will come when the Dow breaks out of its downward channel by breaking above 10,250. Our targets by year-end are back at the January highs of 10,750 and we could test 11,770, the highs from January of 2000 in the early part of 2005. Technology stocks should continue to lead this rally and the drug and healthcare stocks are bouncing back strongly.

"Skyrocketing oil prices have been the biggest factor holding down stock prices. But now they seem more poised to go down than up, and that will be good for stock prices. There are many factors that play into the price of oil, some physical and some psychological. There is no doubt that the global economy is demanding more crude to fuel expansion. But there is also no doubt that plenty of oil exists. The rising prices since 2001 have given oil companies the incentive to expand supply and that is good. This recent rise in prices is actually good in that it will give the incentive to expand reserves and alternate fuels in advance of an economy that is going to be stronger than expected from 2005 to 2009.

"Oil recently hit almost $56 a barrel before pulling back. That is up from as low as $10 in 1999. This price run up is very bubble like and is being fed by the rapid growth in hedge funds and short-term supply factors, not long-term. The sky-rocketing price of crude this year has been driven by fears and speculation. Part of the reason that oil has moved up so dramatically has to do with foreign currency exchange rates. Oil is quoted in US dollars around the world. As the US economy improves over the coming years, the dollar will rise again and that will lower the price of oil, as the fall of the dollar has been a major factor in the rise in oil prices since 2001. Overall, oil prices look like they may already have peaked near-term, and prices are likely to settle down somewhere in the $30s in the next year or two. At the end of this road, crude prices will fall, and most likely fall very quickly as sentiment moves in the other direction. Most important, we don't see a high likelihood that ever-rising oil prices are going to stop the strong economic recovery and bull market ahead. In fact, falling prices are more likely and that will only be a positive for stock prices and the economy.

"In addition to the likelihood of falling oil prices, we note that it won't be a strengthening economy that will lift stocks. It will instead be extreme undervaluation vs. bonds (35%), further falling long-term interest rates due to the slow recovery and low inflation, and continued strong earnings from high productivity and past technology investments by corporations. And remember that stocks are a leading indicator and tend to be 6 to 9 months ahead of the economy. So, don't wait like most investors for the economy to confirm the next bull market. Our indicators say that stocks are very likely to be moving up over the coming months and they will confirm the stronger economic recovery ahead in the second half of next year."

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