Tight Supply Means Higher Energy Prices

07/05/2007 12:00 am EST

Focus: COMMODITIES

Eric Roseman

Editor, The Commodity Trend Alert

Eric Roseman, editor of Commodity Trend Alert, says supply and demand factors will help several energy producers in particular, and he thinks the commodities bull market will continue.

Whether you believe it or not, Peak Oil has arrived: some governments and oil companies will tell you differently, but the facts are that world production peaked earlier this decade amid a serious lack of any new discoveries and booming demand from the emerging markets, namely China.

Currently, global production is about 86 million barrels per day versus roughly 85 million barrels of consumption, still a very narrow margin that’s sensitive to politics, economic warfare, and gaps in production output. 

In my lifetime, I think oil will trade north of $125 a barrel. And over the same period, I think we’ll find other alternatives to oil to supplement our energy requirements. But the road to alternative energy is a long one and for investors, riding this secular bull market means one thing: own the oil companies and the energy indices.

My current plays on the energy complex remain largely contrarian, and that makes these investments highly rewarding over the long-term.

Investors remain worried about Russia and the possibility of tinkering with Lukoil (OTC: LUKOY). I don’t see [Russian President Vladimir] Putin and his buddies messing with Lukoil, because the company is seeking a New York Stock Exchange listing, while ConocoPhillips holds a 20% stake in the entity. Relations are also deteriorating between Russia and the United States, and meddling with this company won’t make things any better.

Lukoil is the world’s best large-cap oil bargain; the company [has] almost the same annual production as Exxon-Mobil, but based on its market capitalization still trades at a whopping 80% discount—a consequence of political risk. On May 9, Lukoil declared a dividend of $1.479 per share. (The ADRs closed just above $78 Tuesday—Editor.)

One historical relationship that has broken down since June is coal prices tied to crude oil. Both sectors usually run together. But since mid-June, Arch Coal (NYSE: ACI) and other producers have taken a big hit following Wall Street downgrades. Once again, the same analysts that didn’t like CBOT Holdings at $80, oil prices at $48, in late January or gold at $400 an ounce now dislike coal. If I followed Wall Street chatter, I’d be bleeding red!

There’s no doubt in my mind that as oil prices eventually break $70 a barrel and higher in this bull market, alternative energy sources like cheaper coal will blast off again. We’re still buying Arch Coal.  (The stock closed around $35.60 Tuesday—Editor.)

The conditions remain very bullish for commodities in the absence of a US monetary squeeze; in fact, I’m still expecting an accommodative Federal Reserve in 2007 and 2008. Supply and demand and credit growth dictate commodities prices—and this bull market is nowhere near dead. 

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