Rock-Bottom Commodities

11/06/2008 10:41 am EST

Focus: COMMODITIES

Eric Roseman

Editor, The Commodity Trend Alert

Eric Roseman, editor of Commodity Trend Alert, says commodities have taken a beating, but may have begun a short-term rally.

After more than 14 weeks of relentless selling, commodities prices appear to be forming a short-term bottom amid the global financial crisis.

The last week of October trading—the worst month in the CRB Index’s 39-year history—finally saw commodities rally. But the CRB Index now trades at mid-2003 levels. The damage done to this benchmark since July has been truly incredible. A sell-off was definitely long overdue, even in the absence of a tsunami building in credit markets last summer; but in no way do prices belong at these low levels.

Commodities, which were heavily overbought heading into July, are now heavily oversold. Every subsector has been bombed relentlessly over the last few months, with some incredible bargains now widespread across the gold mining sector, energy stocks, fertilizer companies, and basically every other segment of the natural resources universe. You name it, it's tanked.

It's still not the time to dive back into most commodities, because global economic growth is not through discounting this recession, probably a deep one. The entire de-leveraging process is still far from over as institutions, including hedge funds, anxiously pray for a rising market from now until December 31st, when client redemptions come home to roost. But as it pertains to commodities, the big sellers at this point have already left town. The real threat now to commodities is the global economy and specifically how China wrestles with a slowing economy going into 2009.

I'm a long-term energy bull. Yes, Chinese consumption is now declining and the world sits on something like a two-million-barrel per-day surplus now, unlike a few months ago. Global demand has contracted since July. However, we won't find new oil discoveries going forward like Brazil found last spring in the Atlantic Ocean. The world is running out of oil—a secular long-term trend.

So, I therefore ask myself if I don't buy the major oil companies now at these distressed levels accompanied by fat dividends, then when? Oil has plunged more than 50% since July. The oil stocks are trading right at the basement.

My favorite large-cap majors remain ENI SPA ADR (NYSE: ENI) of Italy, Total SA (NYSE: TOT) of France, and Russia's Lukoil (OTC: LUKOY.PK), which rallied 20% late last week. These three large-cap oil giants rank as some of the best-performing energy companies among the majors accompanied by high dividends.

Lukoil, the world's most undervalued major oil concern, has been ripped to shreds by the Russian stock market collapse and crude's 50% plunge. Lukoil produces almost the same annual production as Exxon Mobil (NYSE: XOM) but sells at a huge 85% discount based on relative stock market capitalization. The stock now trades at just $25.50, but is worth well in excess of $100. Lukoil is still the cheapest oil major in the world adjusted for its annual production and reserves.

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