Saturday, May 21, 2016

The commodities recovery is on its way; so is the boom.

Was it the China bubble that caused a worldwide expansion of commodity production and related capital overinvestment? But in the sobering aftermath of 30 years of nearly uninterrupted Chinese growth, we have been switching to more moderate requirements – for nearly 5 years now. Yet India and other emerging economies may be waiting in the wings and with improvements in the more mature economies of Europe and the U.S. demand for commodities may now be going up at a faster pace than many expect.  Peter Tertzakian, lately on BNN, pointed out that in spite of all the green thinking and fossil fuel cursing, world oil demand is now approaching 100 million barrels per day.  How much was total oil storage in the U.S. (with storage numbers distorted by imports)? Yep about 530 million barrels or… 5 days of world consumption.
In the meantime, U.S. production has dropped by close to 900,000 barrels and we’re starting to talk about 8 million barrels per day down from 9.6 million. Ohh and non-US production has declined by another 900,000 barrels per day or so and this is assuming that Ft McMurray’s heavy oil production will be mostly restored approaching 2017. That I somehow doubt. Do you really think all that insurance money will be deployed as fast as facilities and infrastructure was destroyed? Especially less economic projects will remain shut-down and insurance money will be used to pay down debt.
So, as perennial controversial Goldman Sachs states, we’re already in supply DEFICIT! Not only Ft McMurray infrastructure was destroyed during this downturn. Thousands of experienced petroleum professionals retired and may not want to come back. The moral damage of young professionals who were sent packing months after they came out of university may also make many think twice to come back rather than picking a less risky career path. Then there is the damage to the oil and gas service industry. No, it will take a while before the oil patch will regain its swagger and not just in North America. Think Venezuela, Iran damaged by 30 years of sanctions, Nigeria, Libya, Iraq, and many other places that were damaged over the last number of years. OPEC is kaput but the new oil tiger on the block is North America. Did the Saudies win by destroying OPEC? Hmmmm? Or was OPEC already gone before the price war?
So yes the best antidote to high oil prices is low prices and vice versa. So if Doha fails and oil prices go up; if the U.S. Fed talks about increasing rates (and thus a higher dollar) and you still don’t see oil prices fall it becomes pretty clear that the game has changed once again. Gold is following a similar story and I think the latest Fed talks about increasing interest rates may be not much more than bluff poker. U.S. inflation is approaching 2% and that doesn’t include the effect of near future rises in oil and gasoline prices. Next winter is nearly certain to be colder than the winter of 2015 and thus natural gas prices maybe on the increase as well. Neither do oil companies need $100-dollar oil any longer to be profitable; think closer to $50 or 60 per barrel. At $70 dollar there may be a new boom. Inflation may be closer to 3 or 4% next year. Even if the Fed interest rate would move above 2%, real interest rates would still be negative – even more so on an after-tax basis. So gold will likely keep on booming, and especially when Justin Trudeau’s Liberals and Alberta’s Notley will increase their deficits, inflation will start biting.
Then there is silver. The Gold price/Silver price ratio is near all-time highs. If gold goes up, silver will go up even faster. Also, don’t forget, as pointed out on BNN by Jaime Carrasco, that silver is often a mining by-product of copper and copper mines are being shut-in as we speak. So silver may go up in price even faster than gold.  Then there is the perpetual discussion on fiat money and government debt: many billionaires like Jim Rogers and George Soros as well as others at the infamous Sohn conference seem to love the precious metals. One billionaire claimed to have 30% of his portfolio in physical gold!

Yes, ladies and gentlemen, the commodities recovery is here and the bull is not far behind,

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