The International Energy Agency (“IEA”) slashed its 2008 oil demand projections by 240,000 barrels a day and its 2009 oil demand projections by 440,000 barrels a day late last week. Clearly, we didn’t need the IEA to tell us that demand for oil has declined since the price of Oil is over $60 per barrel off its June 2008 peak based on WTI’s close of $77.99 on Friday. The obvious question is, where does Oil go from here?
We believe the longer term supply side argument remains intact. Despite the massive investment over the last five years in exploration, worldwide oil production has not been able to keep pace with demand growth, which ostensibly (along with a weak US$ and inflationary global monetary policy) drove the price of Oil well above its marginal cost. Nonetheless, it is likely that the “Trend” in oil remains lower, in the intermediate term.
In theory, commodities should be priced based on their marginal cost and we believe fundamentally that oil will trade back to that level of $60/$65 per barrel. There is also a case to be made that in a recessionary scenario and in an environment where investors are seeking liquidity due to margin calls, that oil overshoots to the downside.
As oil and other commodities decline, many opportunities will arise that you should be proactively focused on. Howard Penney has been discussing on his portal, and in our morning meetings, the potentially massive benefit on year over year cost comparisons for restaurants. Other industries that are key beneficiaries to declining energy costs are airlines, chemicals, and energy intensive manufacturing industries like paper and packaging, etc…
Attached below are our new levels for Oil:
1. Friday’s closing price of $77.99 is immediate term “Trade” oversold
2. Oversold bounce resistance to be sold into = $90.88
3. Downside “Trend” (intermediate term) target = $71.57
Chart courtesy of StockCharts.com