A Melman Minute
By: Leonard Melman
It took an earthquake in the world of petroleum
combined with howls of anguish from numerous quarters, but the American
political leaders finally got the message that the American currency was in
trouble, that weakness in the dollar was becoming a great concern and that
something had to be done. And so, they did the most likely thing possible -
they talked. Both Treasury Secretary Paulson and Fed Chairman Bernanke
indicated that, at long last, they would actually do something to defend the
dollar, even raising the specter of higher, not lower interest rates.
Worldwide markets immediately began to move
decisively. Both Asian and European exchanges sold off by about one percent
and, by 5:20 AM PDT, the U.S. market was forecast to fall about 100 Dow points
at the opening . Gold moved lower overnight to the mid $880s spot (all prices
US$) while the petroleum markets once again gathered strength this morning,
rising to above $137 per barrel after falling back yesterday afternoon.
One of the great issues to be debated is whether the
incredible run in oil from under $20 per barrel in 2001 to almost $140 at its
recent peak is a justifiable move based on supply/demand fundamentals, or
whether it is nothing other than a trading “bubble”. International financier
George Soros recently offered the strong opinion that it is nothing other than a
bubble and he produced several charts of past historic bubbles including the
Japanese security markets of the 1970s and 1980s, the “dot-com” market of the
1990s and the dynamic housing market of the period 2000 to 2006. The upward
price moves look similar to the recent move in oil - and each one was followed
by a major price retreat, the inference being that the move in petroleum is set
for a major decline.
We offer the opinion that this time really is
different, that regarding the international market for crude oil and its
derivative products, that the fundamental background does indeed provide the
basis for the explosive price advances. Demand is growing relentlessly, supply
is not keeping place, disruptions in the form of rioting in countries such as
Nigeria is occurring, explosive growth in auto sales and transportation
requirements are taking place in China and India - among others - and all these
trends remain intact.
In addition, the entire structure of the modern
urban areas with far-flung suburbs, regional shopping areas, distant commutes to
jobs and services will not be easily reversed, if at all.
In fact, the use of petroleum products is absolutely
essential to the functioning of our modern society AND THERE IS NO READY
SUBSTITUTE ON THE NEAR HORIZON.
When all of this information is combined with the
reality that several major oil fields are playing out, that virtually no
economically recoverable giant finds are occurring and that none are likely to
come on-stream quickly, even if discovered, and, lastly, that insufficient
refinery capacity exists to handle surplus production even if it took place, the
picture augurs toward sustained high prices for petroleum over time, with
periodic moves to new higher levels.
Some observers are taking comfort from the fact that
the International Energy Agency as just reduced its forecasted GROWTH in
petroleum usage for the present year to only 800,000 barrels per day, down from
their original growth forecast of one million barrels per day. However, even
this reduced forecast calls for a steady increase in demand without a
commensurate increase in supply.
High petroleum prices are having yet another
negative effect and that is to increase the Balance of Trade deficit in
America. Figures for April were just released this morning which show that
figure rose to almost $61 billion, up form just $56.5 billion in March. Given
the enormous increases in crude prices during May and early June, it is easy to
forecast huge increases in the Trade deficit in coming months - an eventuality
which is likely to put additional pressure on the already weak dollar.
Talk of raising interest rates has caused the bond
market to trade lower overnight as traders evaluate the talk from Paulson and
Bernanke. Readers should recall that prices in existing bonds move inversely to
the direction of interest rates. However, the one tool we have at our disposal
that accurate reflects those interest moves for long bonds is the TYX Index and
we are including that chart this morning to show that the trend over the past
few months was ALREADY toward higher rates, even prior to the latest
announcements. It will be most interesting to watch moves in this index during
today’s trading.
Unfortunately, we won’t be able to watch the
openings as we must catch an early flight to a mining operation in far northwest
Durango State, Mexico. That report will be found in our “Company Reports”
section by late this week.
One other reminder. Your editor will be appearing
on Sunday’s early eye-opener panel session and will be presenting a workshop
entitled “Four Dynamic Trends - Updated June 2008” at the forthcoming Cambridge
House Resource Conference in Vancouver June 15-16. These conferences are
invaluable opportunities to hear presentations from industry analysts and
leaders. In addition, the most recent information from many mining companies is
available in the exhibition hall. Given the incredibly dynamic nature of
markets lately, we urge you to visit this year’s gathering.
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