Posted by Editor on April 9th, 2009
“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
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