I am retired and take educated guesses on all things financial.

October 05, 2006

October 6/7, 2006: Oil...whaddya do?

Thanks for the e-mails on yesterday's post. Expect the unexpected.


Here is my take based upon two respected research reports out today.

OPEC is going to officially reduce oil output by roughly one million BD. This will not matter much, because OPEM members, behind the scenes, cheat.

Serious divisions remain in the cartel, with Iran and Venezuela in one corner and almost all sane members in another.

Non-OPEC oil supply growth is to be roughly 3% in 2007, a 1.5 million BD increase, thus wiping out initial OPEC cuts, and remaining at 3% through the decade.

Global demand growth for oil is to be approximately 1.1%, rising to 1.5-1.7% the remainder of the decade.This is less than dire warnings predicted earlier this year.

Thus, the price of oil is likely going to decrease to approximately $50.00 the barrel over the next year or two, with fluctuations expected in the $55-65.00 per barrel range prior to settling down.In short, there is PLENTY of oil with more on the way.And there is PLENTY of natural gas, too.

Note: The bulk of spare capacity (6%) will lie within OPEC countries, with attending political and policy risks.


I would underweight energy, nor would I buy on any weakness at this point - especially oil and gas.As stated in late August, I would sell oils. Perhaps keep one or two majors for yield and "protection" against the unforeseen.Chevron is a good choice.

Projects like the Canadian oil sands in Alberta, etc. are still going to make some money, but not nearly enough to warrant investment. If you must, Suncorp is my choice.,zero,nada. Bunge is my only recommendation, because all of it's eggs are not in the North American ethanol basket. Smithfield Foods has a nifty pig manure biodiesal operation which is used to power many US Navy ships, but meat is their beat.

I guess driving an SUV will still be a pleasant experience. Driving an overpriced hybrid will and recall problems, and nods of approval from the global warming crowd.

You are invited to read my August 31, 2006 post.

On a different subject, I recommend you visit the Diary section of one of most brilliant and throught-provoking journalists and author in the UK (and the EU), Melanie Phillps.I have had an e-mail correspondance with her and find her to be engaging and very well researched.
She is Churchillian.

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