Supply is why oil prices are sky-high

Every year we meet our economist, Woody Brook of Strategic Decisions, Inc., twice for consultations. You might have heard him in one of our seminars or seen him on video talking. The guy is independent, believes in economic theories and maintains that their right application can give investors a definite edge through uncommon insights into the conditions of any market. We take pride in being counted as his clients as we value his services to us very much.

Although we use very different methods and styles, our general conclusions match up most of the time. We constantly review the basics of the trade, harness that enormous resource called experience, read all we can lay our hands on, scrutinize all the charts of the investment or financial world ---equities, bonds, commodities, interest, foreign exchange—for the past 20-30 years, just to understand a little of what really goes on and which fields can give real opportunities, because they parallel the present but fluid circumstances.

Take Woody’s belief on the high price of oil: supply. Primarily, secondarily, and afterwards just supply. Only long after that does demand come in. That view is echoed by Jean-Claude Trichet, European Central Bank’s president, as well as the top honchos of Shell, RepSol and British Petroleum among other people. They all say it is supply.

Several years back Woody explained this belief in an essay, stating that oil prices was to rise proportionately due to unsolvable problems, the greatest of which is the intractability of major oil companies to invest trillions in possibly hostile areas searching for oil deposits as large as the North Sea fields. Their reason is the fear of the company being nationalized by the host country. So these huge companies refuse to invest in the search for oil reserves to meet the rising demand caused by the growth of developing nations such as China, which has the potential to be the biggest world economy. The consequence of all this is limited supply of oil.

Thus the price chart for crude oil is on the way upwards, without showing any signs of slackening. The recent brouhaha about oil prices being just a bubble –artificially bloated— had lessened somewhat, except that there still are some people who believe it is so. We have stated somewhere else that many of those noises are true, if ever they are.

While energy stocks faltered some a while ago, the steady rising pattern has returned. So we don’t part with them, but get rid fast of falling stocks, which, by the way, we are surprised continue to be part of others’ portfolios.
 

Gold also continues to rise, reaching up to $944.90/ounce. Per the chart, the $950 level should be hit soon, though the slower the rise the more likely it will again reach the all-time high of $1,030.80/oz set 17 March 2008. Gold bullion is a prime bull market that has been rising steadily for years and we remain happily invested in it. We firmly believe it will break through the $2,000/oz level some years hence, so the Black Rock Gold and General Fund should triple in value then.