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Hiding behind gold's flashy moves, oil's the true performer
By Myra P. Saefong, MarketWatch
Last Update: 7:01 AM ET Nov 27, 2009
TOKYO (MarketWatch) -- Gold's been stealing the limelight in the commodities market, but it's really oil that's been the most talented performer.
Oil hasn't grabbed the headlines like gold's climb to record highs near $1,200 an ounce, but oil's no lagger among its commodity peers. Its spectacular moves just haven't been able to steal the attention away from the precious metal.
Despite a hefty drop in oil and gold in electronic trading Friday, oil prices have still jumped around 65% year to date, far outpacing gold's 31 % rise -- and that may only mark the beginning of oil's fancy footwork.
"Unlike oil, a number of other commodity plays are getting very susceptible to having the rug pulled out from under them when investors lose interest," said Neal Ryan, a managing partner at Ryan Oil & Gas Partners LLC.
"As other commodity markets start getting toppy, interest will return to the oil sector because there is the fundamental support to be long-term bullish that might not exist in other commodities," he said.
'Unlike oil, a number of other commodity plays are getting very susceptible to having the rug pulled out from under them when investors lose interest.'
Neal Ryan, Ryan Oil & Gas Partners LLC
And oil, for now, is in a good position to patiently sit tight and wait.
"Unlike the last few years, I believe oil is trading where it should be according to supply/demand data," said Ryan. "Prices ran way too far up, then had a correction that took the price too low -- and now the market has found the right equilibrium."
Crude-oil futures climbed to a front-month record high above $147 per barrel in New York in July of 2008, only to sink back to lows around the $35 level by December. Then by June, they managed to double in price to trade at the $70 mark.
But prices have been struggling to hold and surpass the $80 level and that's prompting many to question oil's strength, maybe even mistakenly so.
Pessimism
It's certainly fair for investors to have their doubts.
After all, conflicts among oil's current fundamental factors nearly guarantee that it's anyone's guess where prices for the energy source will head next.
"Essentially, the Great Recession and oversupply have created an economic and psychological barrier at $80 per barrel," said Anthony Sabino, a professor of law at St. John's University whose legal practice includes oil and gas law. "There are still great concerns about the economy globally, demand is way off with no certainty of a near-term recovery and there is just too much [oil supply] in the pipeline."
With that in mind, James Williams, an economist at WTRG Economics, thinks a "price collapse is far more likely than a new record -- or even $90."
Oil "holds the potential for another price collapse," he said. The price "isn't justified" by the supply, demand or stock levels, demand is still lower than last year, more production capacity is coming on line and recovery will be "slow at best."
As Michael Lynch, president of Strategic Energy & Economic Research, points out: "there's a huge surplus of oil in floating storage right now which should be depressing prices, but isn't."
And much of oil's price gains have been attributed to the U.S. dollar's decline.
Without the "weak dollar story, this market does not have much to be excited about and prices would be quickly vulnerable to a substantial sell off, said Todd Hultman, editor of DailyFutures.com.
The dollar weakness explains some of the current price, but "it doesn't explain most of it," said Williams. "At some point, the futures market must come into balance with the physical supply, demand and stocks -- when it does, we are looking at oil prices in the $50 to $60 range."
So, "while you can always find an anemic green shoot, the U.S. economy is still shedding jobs, the consumer is spending less and saving more and a significant percentage of homeowners are upside down in their mortgages with homes worth less than what they owe," he said.
"Unemployment is high and likely to remain high throughout 2010. This is just not an economic environment that argues for oil anywhere near the current price," he said.
Ready to break free
On the other hand, some analysts believe that oil's merely taking a break in a long-term rally.
While some other commodity gains are begging to look at little overdone, "oil hasn't joined that party -- just consolidated," said Ryan.
That may end up being the right thing to do at just the right time.
'I don't believe consolidating at the $70-$80 price range is setting up for a major step back -- quite the opposite.'
Neal Ryan
"I don't believe consolidating at the $70-$80 price range is setting up for a major step back -- quite the opposite," said Ryan. "As the global economy continues to recover, we'll see prices start a slow march upwards to the triple-digit level again, but the price rise should be orderly and not cause the same issues that the doubling in price over six months caused a year ago."
Oil's really been "stuck behind fast movers like gold, which is a more direct beneficiary of the devaluing and diversification away from fiat currency," said Patrick Kerr, managing director at Amerifutures Commodities & Options. "Crude oil is behind some of the commodities, but soon will be caught up and then some."
He believes that "oil could catch up very quickly and possibly even surpass gold and others at some point as there has been no new production, supplies or alternatives, Asia continues to grow and fiat currencies are likely to be aggressively devalued for a long time to come."
Oil's also likely to benefit further as the West continues to try and "reflate" its way out of the credit crisis by continuing to stimulate its economies through more unprecedented levels of spending, said Kerr.
In that environment, "commodities such as oil and gold, which can not easily be increased in quantity at the same rate as paper money [and] fiat currency will continue to increase in value," he said.
Consider, as well, that emerging markets are still growing and make up a "much bigger slice of the world economic pie," according to Chris Mayer, editor of Agora Financial's Capital and Crisis. "They drive oil demand."
None of the supply-driven issues that took oil to a record high last year are gone, he said. "We still have the same depletion issues. We still have the same aging infrastructure issues. We are still relying on more marginal supplies to meet demand."
"We've had a little breather thanks to the recession, which also delayed a lot of oil projects and sets up another supply bottleneck next year, especially if this economic recovery turns out to be the real thing," Mayer said.
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