A Melman Minute
By: Leonard Melman
PERSONAL NOTE
Every so often, an event of such tragic magnitude
takes place which, although it is outside our area of particular interest, still
requires that we take notice as human beings. Such an event was the savage
cyclone that roared out of the Bay of Bengal, an arm of the Indian Ocean, and
struck with all its fury against the coastal regions of Myanmar, formerly known
as Burma. Initial death estimates came in near 20,000, but it was then
discovered that many towns and villages were wiped out in their entirety and the
estimate was raised to 100,000 persons. Now, most recently, some observers
believe the death toll will be comparable to the tidal wave disaster of
Christmas 2004.
The death toll is truly staggering and we can only
offer our sympathies to the victims and hope that every conceivable aid will
reach the survivors before contamination, hunger and disease raise the death
count to even higher levels.
Regrettably, I am on the early ferry to Vancouver
this morning and must complete this commentary before the financial markets open
in North America. However, early indications point to a slightly higher
opening, thanks to anticipation that the forthcoming retail sales report will be
positive. In overnight trading, all precious metals are relatively unchanged,
but the base metals are lower with copper and nickel being particularly hard
hit. Crude remains near its historic high of $124 per barrel and the U.S.
Dollar is showing some moderate weakness. Securities markets in Asia followed
on the Dow’s 200 point decline of Wednesday by trading lower themselves, but
European markets have rallied from sharp early losses. (All prices US$)
There is no question that the world is now gripped
in oil fever as the price of Crude continues its relentless rise and, early this
morning, Associated Press writer George Jahn waded in with his own take on the
situation. After pointing to speculation among commodity traders as a leading
force in the recent rally, Jahn did concede that, “…The (U.S.) Energy
Department’s Energy Information Administration said in a weekly report that
inventories of distillate fuels, which include diesel and heating oil, fell
unexpectedly while gasoline demand rose slightly last week.”
Our contention is that the combination of supply
shortfalls and rising demand are the key ingredients propelling the
petroleum complex ever higher.
We also note a similarity regarding advancing
petroleum complex prices and those of the grains. In the case of the grains, we
have seen one grain advance very sharply, such as soybeans, while corn and wheat
might be unchanged or even falling. Then conditions change and wheat may surge
ahead while beans and corn are quiet. In the same manner, during the past few
months we have noticed that Heating Oil has surged more dramatically than
gasoline. We offer charts of the two commodities for comparison and the
difference in the recent force of their rallies can be noted.
As can be readily observed, during the period when
heating oil rallied from about $1.92 up to almost $3.50 per gallon, a gain of
more than $1.50, gasoline moved from just above $2.00 per gallon to near $3.12 -
a gain of “only” about $1.10 per gallon.
The outsized gains in Heating Oil are a particular
inflation concern because huge numbers of people live in temperate to cold areas
in North America, Europe and Asia and, unless prices correct between now and
this coming November, next winter’s heating bills could become a truly
oppressive burden for hundreds of millions of households, thereby creating
additional inflationary pressures, as well as a drag on domestic economies, as
discretionary purchases are further reduced.
One last note about the petroleum situation which
indicates the price problem could get much worse. A huge battle is ongoing in
Mexico regarding domestic government control of their petroleum industry, a
control exerted through state-run Pemex Corporation. Mexico’s petroleum
production is declining with relentless force and has fallen 15% in the last
year alone at its major field, Cantarell.
Mexico desperately needs the technical expertise
available from North American and European sources to develop new producing
reserves of petroleum, but some Mexican politicians and the public at large are
not willing to cede any control over Mexico’s domestic petroleum industry to
foreigners, and no foreign corporation will undertake such expensive and complex
operations without some equity and profit participation.
So, matters remain at a standoff, production
continues to decline, and the demand/supply imbalance in the world’s oil
situation continues to grow more critical.
Goldman Sachs recently stunned the world by
raising their forecast for oil prices to $200 per barrel within the next six to
twenty-four months. We not only agree, but we believe that if they are in
error, it will be on the short side.
Increases of such sizes, should they occur as
forecast, could cause inflationary and social chaos, both of which could provide
the springboard for tremendous rallies in the precious metals.
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