S&P reckons oil market not like the 70s but good for gold

Filed under: US stocks, gold — peterjcooper @ 3:59 pm

Today I caught up with Standard & Poor’s VP for commodities, Eric W, Kolts who was over from New York speaking at a conference in Dubai. He is resolutely bullish on oil prices, and rejected my comparison to the 70s.

‘I can remember what happened then personally and it was not the same. The 70s oil price spikes, and there were two big ones were caused by political interference in the marketplace, not the fundamentals of supply and demand.’

Mr. Kolts is of the opinion that the oil market has undergone a structural shift with demand way out of line with the capacity of existing installed infrastructure to deliver supply. This is very different from political interference –

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the Arab oil embargo of 1973 or the Iranian revolution in 1979 – and makes a correction in price far more difficult.

‘We have seen forward oil prices move up by an unprecedented $45 since the beginning of the year,’ he says. ‘Of course there is a speculative element but this is also the start of including the cost of new infrastructure in the oil price. It is a structural shift and if you are going to tap oil offshore in a place like Brazil this is necessary to pay the cost of extraction.’

On the demand side Mr. Kolts is convinced that the tripling of the GDP of China and India since the year 2000 has also produced a permanent increase in demand for oil as China’s one million new car owners a year are not about to go back to their bicycles. Yet the oil market is still puzzling.

‘We have seen the open position in WTI crude declining since July 2007 which implies short position covering and should be producing a decline in the price,’ he says. ‘But it looks as if over-the-counter trading is more than compensating with prices rising further out.

‘I think oil prices will prove far more resilient in this climate and that we are in a super bull market due to the long-term fundamentals of emerging markets which have now emerged.’

At the same time Mr. Kolts believes petrodollars will find their way into gold as a dollar hedge with silver ‘riding on the coat-tails’ of gold. ‘The Middle East and Russia were always the big buyers of precious metals when I was a trader in the 1980s and this is of course a hedge against inflation and a declining dollar.’

But clearly S&P’s top commodities analyst does not see the oil boom fading away anytime soon because of market fundamentals. ‘That would take a very deep and long US recession,’ he concludes. Interestingly Mr. Kolts is very bearish on the outlook for US equities.