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Pressure Builds On U.S. Dollar

I don’t know about you, but I’m noticing more concern overseas these days about the greenback. From Bloomberg’s Mark Deen today:

Suresh Tendulkar, economic adviser to Indian’s Prime Minister Manmohan Singh, is urging the government to diversify its foreign exchange reserves and hold fewer dollars, he said today.

“The major part of Indian reserves are in dollars — that is something that’s a problem for us,” Tendulkar said in an interview in Aix-en-Provence, France today.

He also said that world currencies need to adjust to reflect trade imbalances.

India’s neighbor, China, also continues to exert pressure on the U.S. currency. From the staff over at the Business Intelligence Middle East website today:

China requested that a new global currency be discussed at next week’s G8 meeting in Italy. The news sent the dollar into a downward spiral and the price of gold rallied, confirming its status as a currency hedge.

Wednesday’s sharp rebound in Gold Prices to US$945 faded overnight after a Beijing official refuted claims that China wanted discuss a new global reserve currency at next week’s G8 meeting of political leaders in L’Aquila, Italy…

Specifically, the People’s Bank of China said the IMF should manage part of members’ foreign-exchange reserves.

“To prevent the deficiencies in the main reserve currency, there’s a need to create a new currency that’s delinked from the economies of the issuers,” the People’s Bank of China (PBOC) said in a review of the economy in 2008 released today. In March, the PBOC had urged the IMF to expand operations of its Special Drawing Rights currency (SDRs) and move toward a “super-sovereign reserve currency.”

The PBOC statement comes after a top Communist Party research chief said that China should buy gold and US real estate rather than Treasurys.

Former Chinese Vice Premier Zeng Peiyan highlighted the nation’s concern at the risks posed by a global financial system dominated by the dollar, urging more oversight of countries issuing reserve currencies.

“There should be a system to maintain the stability of the major reserve currencies,” said Zeng, the head of a research center under the government’s top economic planning agency. Fiscal and current-account deficits must be supervised as “your currency is likely to become my problem,” he said in a speech in Beijing today.

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The Russians haven’t kept quiet on the issue either. Bloomberg’s Mark Deen and Isabelle Mas wrote this afternoon:

Russian President Dmitry Medvedev has repeatedly called for creating a mix of regional reserve currencies as part of the drive to address the global financial crisis, while questioning the dollar’s future as a global reserve currency. Russia’s proposals for the Group of 20 major developed and developing nations summit in London in April included the creation of a supranational currency.

“We will resume” talks on the supranational currency proposal at the G-8 summit in L’Aquila on July 8-10, Medvedev aide Sergei Prikhodko told reporters in Moscow today.

Sources:

“India’s Tendulkar Says Govt Should Diversify Forex Reserves”
Mark Deen
Bloomberg, July 3, 2009

“Gold’s investment credentials boosted by China’s quest for new global currency”
MI-ME Staff
Business Intelligence Middle East, July 3, 2009

“India Joins Russia, China in Questioning U.S. Dollar Dominance”
Mark Deen, Isabelle Mas
Bloomberg, July 3, 2009

States Raise Taxes On Oil And Natural Gas Production

Continuing on the topic of energy, I stumbled on a piece by the Wall Street Journal’s Ben Casselman yesterday in which he wrote revenue-starved states are hiking taxes on natural gas and oil production. Casselman said:

Cash-strapped states are considering raising taxes on oil production to plug yawning budget gaps, but they face strong resistance from oil companies, which warn the moves could lead to lost jobs and higher energy prices.

Lawmakers in Pennsylvania and California have proposed what are known as severance taxes on oil and natural gas produced in their states. A tax increase took effect in Arkansas at the beginning of the year, and Alaska last year raised its oil-production tax…

“Given the economy, any source of revenue is significant,” said Chuck Ardo, a spokesman for Pennsylvania Gov. Ed Rendell.

Mr. Rendell has proposed a 5% tax on natural gas produced in his state, which faces a one-year, $3.2 billion budget deficit. A legislative committee this week approved the measure, which requires approval by the full House of Representatives.

In California, Democrats are pushing a 9.9% severance tax to help close the state’s projected $24 billion deficit. But Gov. Arnold Schwarzenegger, who earlier this year supported adopting a severance tax, is now opposed, saying the state has raised taxes enough already.

Energy interests argue that higher taxes would lead companies to shift their drilling elsewhere, leading to lost jobs and lower tax revenue. And they say reduced drilling could lead to greater dependence on imported oil and higher energy prices.

Should Pennsylvania or California go through with their proposed severance taxes, Louisiana looks to welcome their oil and gas producers with open arms. Casselman added:

Some lawmakers in Louisiana want to take the opposite tack, in a bid to attract more drilling. The state House of Representatives recently approved a package of tax cuts targeted at certain high-cost forms of oil and gas production. Democratic Rep. Nickie Monica, the lead sponsor of one measure in the package, said he hopes to give Louisiana a competitive advantage at a time when other states are raising taxes. “We’re bucking a national trend,” he said.

Tax competition sucks, huh?

Source:

“States Consider Gas and Oil Levies”
Ben Casselman
Wall Street Journal, June 30, 2009

Another Oil Supply Crunch Headed Our Way?

Yesterday, Nobuo Tanaka, executive director of the International Energy Agency, spoke with Bloomberg’s Isabelle Mas about the outlook for global crude oil and natural gas demand. While the IEA cut five-year forecasts for crude demand and predicted consumption would not return to last year’s levels until 2012, Tanaka warned of the potential for an oil supply “crunch” down the road. He said:

For the mid-term, in the high-economic growth case, the demand is coming back and the market is getting tighter because we expect that because of the current market situation, the financial crisis, the investment to the capacity will slow down. So, we may have very low spare capacity. And even if economic growth is higher, the spare capacity is getting very slim. And that means that we may have the supply crunch again, just like the last year, in 2014-2015.

Some wonder if the IEA’s supply estimate may even be too rosy. From the website of UK-based energy publication Energy Risk today:

Supply-side projections in the International Energy Agency’s (IEA) Medium-Term Oil Market Report 2009 are “too optimistic” and “will be subject to substantial revisions in time,” according to a research report by Costanza Jacazio, commodities analyst at Barclays Capital.

The IEA report forecasts that net production capacity will expand by 4mb/d between 2008 and 2014 with 2.6 million barrels per day (mb/d) of new OPEC natural gas liquids (NGLs) production, 1.7mb/d of OPEC’s crude net capacity additions and a net decline of 0.4mb/d in non-OPEC production.

However Barcap says it believes that the profile for non-OPEC production will be subjected to hefty downward revisions. “Higher-than-expected decline rates at mature fields and longer-than expected lead times for the start-up of new projects has resulted in a systematic upward bias in IEA’s non-OPEC production estimates over the past few years,” the research report says.

The report cites the mid-term report of 2006, in which the IEA was projecting non-OPEC supply of 3.3mb/d between 2006 and 2009. In the latest update, that figure stands close to 1mb/d, implying a cumulative downward revision of 2.3mb/d over that three-year period. Similarly, the detailed forecast for non-OPEC supply growth in 2009, first released by the IEA in mid-2008, has already been downwardly adjusted Barcap says.

You can view the 2 minute 54 second Bloomberg segment here.

Sources:

Nobuo Tanaka Interview
Bloomberg, June 30, 2009

“IEA forecasts too optimistic says Barcap”
Energy Risk (UK), June 30, 2009

Advice For The Hotshot Fund Manager

Investor, commentator, and author Jim Rogers was recently interviewed by staff of the Economic Times (India) website. One statement from the former partner of George Soros stood out in particular:

What will you tell a confused fund manager who seeks your advice?

Become a farmer. The world has tens of thousands of hotshot fund managers right now. If I am correct, the financial community is not going to be a great place to be in for the next 30 years. We have many periods in history when financial people were in charge, we had many periods when people who produced real goods were in charge — miners, farmers, etc.

The world, in my view, is changing and is shifting away from the financial types to producers of real goods, and this is going to last for several decades as it always has. This may sound strange but it always happens this way.

Ten years from now, it may be farmers who will drive the Lamborghinis and the stock brokers will drive tractors or taxis at best.

Source:

“Fund Managers can become farmers: Jim Rogers”
Economic Times (India), June 3, 2009

Nouriel Roubini Warns Of ‘Perfect Storm’ In 2010

There once was a time when former Clinton administration Treasury Department director Nouriel Roubini was seen as a “madman” by the global financial community for his predictions of an economic tsunami. The New York Times’ Stephem Mihm wrote back on August 15, 2008:

On Sept. 7, 2006, Nouriel Roubini, an economics professor at New York University, stood before an audience of economists at the International Monetary Fund and announced that a crisis was brewing. In the coming months and years, he warned, the United States was likely to face a once-in-a-lifetime housing bust, an oil shock, sharply declining consumer confidence and, ultimately, a deep recession. He laid out a bleak sequence of events: homeowners defaulting on mortgages, trillions of dollars of mortgage-backed securities unraveling worldwide and the global financial system shuddering to a halt. These developments, he went on, could cripple or destroy hedge funds, investment banks and other major financial institutions like Fannie Mae and Freddie Mac.

The audience seemed skeptical, even dismissive. As Roubini stepped down from the lectern after his talk, the moderator of the event quipped, “I think perhaps we will need a stiff drink after that.” People laughed — and not without reason. At the time, unemployment and inflation remained low, and the economy, while weak, was still growing, despite rising oil prices and a softening housing market. And then there was the espouser of doom himself: Roubini was known to be a perpetual pessimist, what economists call a “permabear.” When the economist Anirvan Banerji delivered his response to Roubini’s talk, he noted that Roubini’s predictions did not make use of mathematical models and dismissed his hunches as those of a career naysayer.

“Dr. Doom,” as he is sometimes called by the media, turned out to be correct in his assertions.

Fast forward to May 28, 2009. Reuters’ Marie-France Han wrote:

Nouriel Roubini, the famously glum economist who predicted the financial crisis, said that while the recession in the United States may well be over at the end of the year, another dip was still possible next year.

“I still expect that economic growth in the U.S. is going to be negative through Q4, and that we’ll see positive growth in Q1,” Roubini told Reuters in an interview on the sidelines of the Seoul Digital Forum.

“The U.S. recession is going to be U-shaped, lasting roughly 24 months,” he added.

“Compared to the current consensus that says we are practically at the end of the recession … my view is: no, it’s going to last another six to nine months before it’s over.”

According to Han, the chairman of Roubini Global Economics LLC also warned of the potential for a “perfect storm” down the road. From the piece:

Roubini stood by a recent article in which he mentioned the possibility of a “perfect storm” in 2010.

“There is even a risk of a double dip, a W-shaped recession at the end of next year,” he said, a combination of rising oil prices, rising public debt and increases in real interest rates, rising concerns about inflation and the expiration of a number of tax cuts in the United States.

Last week, Dr. Roubini talked about this “perfect storm” in a piece he wrote for Forbes. From their website on May 21:

We cannot rule out a double-dip W-shaped recession, with the wings of a tentative recovery of growth in 2010 at risk of being clipped toward the end of that year or in 2011. This will result from a perfect storm of rising oil prices, rising taxes and rising nominal and real interest rates on the public debt of many advanced economies, as concerns rise about medium-term fiscal sustainability and the risk that monetization of fiscal deficits will lead to inflationary pressures after two years of deflationary pressures.

I think I’ll have that stiff drink now…

Sources:

“Dr. Doom”
Stephem Mihm
New York Times, August 15, 2008

“Roubini says U.S. economy may dip again next year”
Marie-France Han
Reuters, May 28, 2009

“Don’t Believe The Optimists”
Nouriel Roubini
Forbes, May 21, 2009

Gold Investment Demand Triples Year-Over-Year

A recent report shows that investment demand for gold is more than making up for a drop in jewelry and industrial demand. From MarketWatch’s Morning Zhou yesterday:

Gold investment demand in the first quarter more than tripled from a year ago to a record level as investors piled into gold exchange-traded funds to hedge against the global economic downturn, according a report released early Wednesday by an industry group.

A drop in jewelry and industrial demand partly offset the jump in investment demand, the report said. Meanwhile, gold supply also surged in the first quarter as high prices encouraged record levels of recycling, which in turn curbed the rally in prices. Gold prices made a modest 4.3% gain during the first quarter.

Investment demand totaled 595.9 metric tons in the first three months of the year, up from 171.3 metric tons a year ago, the miner-sponsored World Gold Council said. Among them, demand for gold exchange-traded funds such as the SPDR Gold Trust (GLD 90.96, +0.60, +0.66%) hit 465.1 metric tons, up sharply from 72.7 metric tons a year ago.

Total gold demand, however, marked a more modest increase, as jewelry and industrial consumption declined. Overall, gold consumption hit 1,015.5 metric tons in the first quarter, up 38% from a year ago.

Zhou talked some more about the surge in investor demand. From the piece:

ETF investment accounted for nearly 80% of total investment demand in the first quarter, surpassing bars and coins to become the most important tool for gold investors, the WGC report showed. It accounted for 45% of total gold demand.

At 465.1 metric tons, ETF demand also topped jewelry consumption for the first time ever. Jewelry demand stood at 339.4 metric tons in the first quarter, down 24% from a year ago.

The bulk of ETF demand was from the SPDR Gold Trust (GLD 90.96, +0.60, +0.66%), the biggest gold ETF. Investment inflows in the ETF totaled 347.21 metric tons in the first quarter.

“Safe haven flows continued to spur investor interest [in gold] in the first quarter,” the WGC said in the report. “While jewelry and industrial demand are likely to continue to struggle in this environment, investment demand should remain well underpinned.”

Source:

“Gold investment hits record as recession triggers demand”
Morning Zhou
MarketWatch, May 20, 2009

Credit Crunch Hits Farm Belt

The credit crunch has arrived at the doorsteps of rural America. From the Associated Press’ Roxana Hegeman yesterday:

More lenders are tightening their restrictions for agricultural loans in the Midwest at the same time that repayments on loans have dropped, The Federal Reserve Bank of Kansas City says.

The Federal Reserve reported Friday that its quarterly survey found that the percentage of lenders raising collateral requirements reached another record high in the Tenth Federal Reserve District. The rate of loan repayments also fell for the second straight quarter.

Turbulent agricultural conditions contributed to the tightened farm credit, the agency said.

“The thing to take away from all of this is … farmers are positioning themselves to get through turbulent times,” Federal Reserve economist Brian Briggeman said.

The district includes Colorado, Kansas, Nebraska, Oklahoma, Wyoming as well as parts of New Mexico and Missouri.

Hegeman discussed other findings from the quarterly survey. She wrote:

Survey respondents reported farm income had slipped from the record highs of last year, especially in Oklahoma and Kansas. Livestock producers also were struggling with low cattle and hog prices amid waning global demand for meat.

New equipment sales slowed dramatically. The Association of Equipment Manufacturers reported a 20 percent decline in tractor sales during the quarter when compared to last year’s record high, according to the report.

Farmland values appeared to stabilize after modest declines in 2008, and most bankers expected those values to hold steady, the agency reported.

Non-irrigated farmland values rose 1.4 percent across the district compared to the previous quarter, with no change in the value of irrigated acreage. Ranchland values declined by less than 1 percent, reflecting the struggling livestock sector.

Nebraska had the most dramatic fluctuations in land values with the highest gains in 2008, but also the sharpest declines in the past two quarters.

The Federal Reserve’s quarterly report was compiled from 255 lenders surveyed.

You can read the entire four page survey (in .pdf format) here.

Source:

“Federal Reserve: Agricultural credit tightened”
Roxana Hegeman
Associated Press, May 18, 2009

Hedge Funds Increase Gold Investments

“Don’t you invest in that just because you think it’s a good idea. I’m warning you.

It’s gold — that so-called safe haven for your assets — and if you’re considering it today, let me explain why you need to bypass it and move on. Although gold may well be one of your favorite items in the vault, as a long-term investment, it is just plain lousy.”

-Nick Kapur, The Motley Fool, May 11, 2009

A growing number of hedge fund managers might disagree with Mr. Kapur’s assessment of the yellow metal. The Dow Jones Newswires’ Joseph Checkler wrote the following on the SmartMoney website last night:

Hedge fund firms Paulson & Co. and Lone Pine Capital made big bets on gold during the first quarter, becoming the No. 1 and No. 2 shareholders, respectively, in the SPDR Gold Trust (GLD) exchange-traded fund, according to regulatory filings.

Paulson & Co. – run by John Paulson, who had already been beefing up his exposure to gold companies – bought 31.5 million shares of the ETF during the first quarter, according to its mandatory end-of-first-quarter holdings report with the Securities and Exchange Commission. That stake would be worth more than $2.8 billion if Paulson still holds all those shares at present.

Stephen Mandel’s Lone Pine bought 26.5 million shares of the ETF, which would be worth $2.4 billion if it still holds those shares. Lone Pine didn’t immediately return a message seeking comment.

Many hedge fund managers have been increasing their gold investments lately. More than 28% of the SPDR Gold Trust ETF’s outstanding stock was owned by hedge funds as of the end of the first quarter, according to Factset Research Systems.

The increased bets on gold come as the price of the yellow metal have remained high, above $900 an ounce. Funds also see hard assets as insurance against further turmoil in the financial system, including a decline in the value of paper currency.

Source:

“Hedge Funds Making Big Bets on Gold”
Joseph Checkler
SmartMoney, May 18, 2009

Robert Prechter Sees Stock Plunge, Deflationary Depression

If Marc Faber’s prediction that the U.S. government will go bust didn’t start your weekend off on a positive note, how about Robert Prechter’s forecast that U.S. stocks will plummet in advance of a deflationary depression? From Reuters (UK) yesterday:

Longtime technical analyst Robert Prechter, who forecast the 1987 stock market crash, predicted this week that U.S. equities may plunge to half their lows hit in March as a deflationary depression bites.

Oil and U.S. Treasury bonds are also locked in long term bear markets, while corporate bond prices will plunge precipitously by next year as broad economy, banking system and company earnings sustain more damage from a financial crisis that’s akin to the Great Depression, he said.

The U.S. S&P 500 stock index’s rebound by nearly 40 percent since it sagged to a 12-year closing low of 676 points on March 9 is not sustainable, Prechter said in an interview with Reuters.

“It’s not the start of a new bull market,” said Prechter, chief executive at research company Elliott Wave International in Gainesville, Georgia. “Our models are (showing) right now that it is a much bigger bear market than most people realize, something along the lines of 1929-1932,” he told Reuters in a wide ranging interview. “It’s a very rare event,” he added.

“I think the next leg down will be at least as severe if not more severe than what we just experienced. So you want to stay on the side of safety,” he said.

As in his 2002 book “Conquer the Crash,” which warned of the dangers of a U.S. debt bubble and deflationary depression, Prechter continues to advocate safer cash proxies such as Treasury bills…

“Deflation is coming, it’s going to lead to a depression. We’re not at the bottom yet,” Prechter said. “I think we are going to have bouts of deflation separated by recoveries.”

Source:

“Stocks still face deflationary collapse: Prechter”
Haitham Haddadin, Ellis Mnyandu, and John Parry
Reuters (UK), May 14, 2009

Prices At The Pump Rising Again

Let the squealing about high gas prices begin. Again.

From CNN Money’s Ben Rooney today:

There’s plenty of economic pain to go around these days because of the recession. Now there’s this: Gas prices have surged nearly 10% over the past two weeks.

That’s a gain of 20 cents during the past 14 days, and the national average hit $2.248 a gallon on Tuesday, according to a survey by motorist group AAA…

The recent spate is not the first time this year that gas prices have risen dramatically for a short period. In January, prices jumped more than 10% in less than two weeks.

And the current runup is not surprising because prices typically increase ahead of the Memorial Day holiday – the unofficial beginning of the peak summer driving season.

The CNN Money staff writer also pointed out:

Many analysts expect gas prices to continue climbing over the next few weeks, largely because of rising crude oil prices, the main ingredient in gasoline.

Source:

“Gas prices surge 10%”
Ben Rooney
CNN Money, May 12, 2009

China Critical Of Dollar, Global Currency System

Chinese officials continue their assault on the U.S. currency and “flawed” international monetary system. From the Agence France-Presse yesterday:

China called Sunday for reform of the global currency system, dominated by the dollar, which it said is the root cause of the global financial crisis.

“We should attach great importance to reform of the international monetary system,” Chinese Vice Finance Minister Li Yong told the spring IMF/World Bank Development Committee meeting in Washington.

A “flawed international monetary system is the institutional root cause of the crisis and a major defect in the current international economic governance structure,” Li said, according to a statement.

“Accordingly, we should improve the regulatory mechanism for reserve currency issuance, maintain the relative stability of exchange rates of major reserve currencies and promote a diverse and sound international currency system.”

As the world’s main reserve currency, US dollars account for most governments’ foreign exchange reserves and are used to set international market prices for oil, gold and other currencies.

As the issuer of the key reserve currency, the United States also pays less for products and can borrow more easily.

Li did not name the dollar but in late March the People’s Bank of China Governor Zhou Xiaochuan said he wanted to replace the US unit which has served as the world’s reserve currency since World War II.

“The outbreak of the crisis and its spillover to the entire world reflected the inherent vulnerabilities and systemic risks in the existing international monetary system,” Zhou said, suggesting the International Monetary Fund could play a greater role.

Zhou’s remarks sparked uproar and concern since China has the world’s largest forex reserves at 1.9 trillion dollars. China became the world’s top holder of US Treasury bonds last September, and currently holds around 800 billion dollars, according to official US data.

Beijing has voiced increasing concern over its massive exposure to the US dollar as the global crisis has steadily deepened but after some tense exchanges, the issue appears to have eased in recent weeks.

Then again, maybe not.

Settle it over ping pong?

And what’s China been doing with all those foreign-exchange reserves? Buying hard assets, including gold, of course. From MarketWatch’s Chris Oliver last Friday:

China has boosted its gold reserves to 1,054 metric tons, according to a Friday report by Xinhua News Agency, which cited Hu Xiaolian, head of the State Administration of Foreign Exchange.

The increase makes China the world’s fifth-largest holder of gold, just ahead of Switzerland, and among the six nations plus the International Monetary Fund that have reserves of more than 1,000 metric tons.

Hu said that China’s gold reserves had risen by 454 metric tons since 2003 and that the total was being reported to the IMF per the organization’s rules.

The comments are China’s first public acknowledgement in more than five years that its gold reserves had increased.

The new figure is 76% higher than the 600 metric tons reported at the end of March, a level that had been unchanged since December 2002.

It is thought the latest gold acquisitions came from domestic sources. From the piece:

Analysts said China’s bullion buying reflects efforts to diversify its nearly $2 trillion stockpile of foreign-exchange reserves.

“Chinese officials have been increasingly vocal about their concern on the U.S. dollar and the U.S. bailout policies of late, and have actively been seeking to diversify into other assets, especially commodities,” said Martin Hennecke, an associate director with Tyche Group in Hong Kong.

Traders in Hong Kong said that some of the additional reserves were likely acquired on the Shanghai gold market during January and February. The physical market remained well-bid by an unknown buyer despite bullion prices spiking to levels that normally cooled demand, they said.

Purchases were made in Shanghai, traders said, in an effort to absorb domestic production and lessen the impact of bullion prices on global markets…

Traders also say the gold was accumulated systematically over a number of years.

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Sources:

“China calls for reform of global monetary system”
Agence France-Presse, April 26, 2009

Quote For The Week

I think you should move back to Indiana and marry a farmer. There are times in history when the money lenders have been in charge, and we just came through one of those periods. But it wasn’t always that way. Wall Street was a backwater in the ’40s, ’50s, ’60s and ’70s, and it will be again.

Farmers are going to be the ones driving Lamborghinis, and the traders are going to have to learn to drive tractors.

-Legendary investor Jim Rogers, in an interview for the April 20 issue of Newsweek

Related Post

Do any of you follow legendary investor Jim Rogers? Well, he’s coming out with a new book by the end of the month. From our sister blog Investorazzi.com this morning:

“New Book By Jim Rogers”

He’s the swashbuckling world traveler and legendary investor who made his fortune before he was forty. Now the bestselling author of A Bull in China: Investing Profitably in the World’s Greatest Market, Hot Commodities: How Anyone Can Invest Profitably in the World’s Best Market, and Adventure Capitalist: The Ultimate Road Trip shares a heartfelt, indispensable guide for his daughters (and all young investors) to find success and happiness. In A Gift to My Children, Jim Rogers offers advice with his trademark candor and confidence, but this time he adds paternal compassion, protectiveness, and love. Rogers reveals how to learn from his triumphs and mistakes in order to achieve a prosperous, well-lived life.

Cheap Oil May Not Be Around For Much Longer

“Morgan Stanley said crude oil prices are likely to decline in the second quarter ‘and remain at depressed levels through 2009.’”

-Bloomberg, March 19, 2009

Back in late February, Jim Rogers, the well-known hard assets investor, told CNBC’s Maria Bartiromo the following in an interview:

Oil prices are down at the moment, but that’s temporary. And you’re going to see higher prices, especially of commodities, because the fundamentals of commodities are enhanced by what’s happening.

So, what exactly IS happening? Last night, MarketWatch’s Steve Gelsi shed some light on what the commodities guru was referring to. Gelsi wrote:

ConocoPhillips Chief Executive Jim Mulva didn’t mince words with Wall Street analysts when, in the face of a slowing economy and lower oil prices, he outlined the oil major’s nearly $2 billion cut in capital spending for 2009 and other belt-tightening measures.

“We believe our decisions, actions and plans will enable us to live within our means,” Mulva said following the company’s fourth-quarter results in February.

ConocoPhillips is far from alone in its effort to scale back spending to deal with the harsh economic realities, as energy-infrastructure projects around the world are put on hold in the wake of oil’s slide to $50 a barrel from more than $100 last year.

U.S. petroleum inventories sit at about 360 million barrels, their highest level since 1993, and natural-gas supplies remain at 1.65 trillion cubic feet, some 32% more than a year ago and 22% above the five-year average.

Against this backdrop, experts and energy company officials are now debating whether the cutbacks in production and infrastructure spending could lead to energy shortages and to another price spike down the road.

Oil’s 40% rise from multiyear lows of $35 a barrel in December to about $50 now — with just a whiff of economic recovery on the horizon — illustrates how quickly prices could resume their climb toward last year’s record of $147.

Rogers, who correctly predicted the start of the commodities bull market back in 1999, has been telling the financial media and anyone willing to listen to him that the recent decline in commodity prices, in conjunction with the difficulties by commodity producers to access capital due to the credit crunch, is resulting in the postponement or cancellation of projects meant to increase production capacity, thereby setting the stage for higher hard asset prices down the road.

Some veteran traders and investors understand where the author of such books as Hot Commodities: How Anyone Can Invest Profitably in the World’s Best Market and A Bull in China: Investing Profitably in the World’s Greatest Market is coming from. From the MarketWatch piece:

“Every bull market in oil is really born in the zenith of a bear market,” said Phil Flynn, vice president at Alaron Trading in Chicago. “The cutbacks we see today are going to lead to a spike somewhere in the future. The big question is when it’s going to happen.”

Energy traders are keeping an eye on production cuts by the Organization of Petroleum Exporting Countries, as well as scaled-back capital projects by the Western oil majors and state-run oil giants such as Saudi Aramco or Russia’s Rosneft.

“If the economy comes back and they don’t ramp up quickly, prices could spike up,” Flynn added.

Gelsi pointed out additional evidence of retrenchment by the oil industry. He wrote:

Gene Shiels, assistant director for investor relations at oil-field service giant Baker Hughes Inc., said that since late last summer, energy companies have scaled back the number of drilling rigs actively looking for oil and gas in the United States by about 50%…

Outside the United States, large deepwater-drilling projects have been slower to scale back, because they require years to complete and are funded by consortiums of big oil companies and overseas governments. But even some of these major undertakings may soon feel the pinch, according to Shiels.

“If oil stays at $40 or even $50 a barrel, a lot of heavy oil projects in Canada or deepwater projects may not continue,” he said. “We could we setting the stage for an oil spike if capital spending is cut for a long time.”

Gelsi pointed out one final hurdle to increasing production capacity. From the article:

Energy producers face the double challenge of a current supply glut, coupled with relatively high costs of building energy projects. While oil prices are half of what they are a year ago, the price tag for building deep-sea oil rigs and other infrastructure remains about double what it was a decade ago, and hasn’t fallen that much since energy prices burst last year.

All this, just when you thought it was safe to buy that ginormous SUV you’ve had your eye on.

Oh, and by the way, here’s the second part of that Bloomberg excerpt from March 19:

“Oil will ‘eventually’ head back toward $100 a barrel once the economy recovers and global supplies decline, Morgan Stanley said in a note today.”

(Note: The author disclaims any personal liability, loss, or risk incurred as a consequence of the use and application, either directly or indirectly, of any information presented herein.)

Sources:

“Morgan Stanley Says Oil ‘Will Remain Depressed’ Through 2009”
Alexander Kwiatkowski
Bloomberg, March 19, 2009

“Jim Rogers Doesn’t Mince Words About the Crisis”
Maria Bartiromo
BusinessWeek, February 26, 2009

“Energy-spending cutbacks spark price-spike talk”
Steve Gelsi
MarketWatch, April 8, 2009