Oil - The Commodity that will not stay down

I will let you on to a secret today. I have been buying a lot more Oil than I had planned on. This kind of bargain prices on Oil will not last for long.

The price of Oil has only one way - UP!!!

And here is why...

Oil is a depleting resource. Worldwide, we have slowing down production in every country that produces Oil today. Saudi Arabia lies to us about their reserves in the ground. Mexico has openly acknowledged that its production is in decline. Nigeria is a mess. Iran / Iraq are completely unstable and will stay that way for a decade or longer. So that leaves Oil production out of the ground lower and lower each year.

Demand for Oil is continually on the rise. There is a deep pattern of growth emerging in Asia. China, India, Malaysia, Indonesia. Smaller countries like Cambodia, Vietnam, Thailand, are also growing at a rapid pace. This is the first time in a century that Asia sees an opportunity to grow and grow rapidly. These countries will do their damnest to make sure they not lose this chance to gain a upper hand and increase their standard of living. Something they have envied the West for decades.

Let's not forget US and Europe. Yes, granted that these two are the largest economies in the world and are currently in trouble. Yet, we are expecting a slow and steady 2% GDP growth in these engines as well. So there will be a steady demand for Oil here as well.

The third component of Oil pricing is the Hedge Funds, Big Banks, Speculators and all the non users of Oil. Oil is now a currency. It is bought and sold as an asset class as much as Gold and other commodities. The exogenous players of Oil are here and will always remain. As long as free capitalism in this world, players will find a way to play. 

Today's weakness in Oil is based on the current  doubts in Europe and partially due to the wave of financial regulations that are sweeping America. And let me tell you one thing - This wave of reforms, as we know it today, will not be able to tame the deep desire within mankind. The only change these kind of regulations will bring is to help shift trading patterns, instruments and locations of trading. If the US clamps down too hard on the likes of Goldman, they will move offshore and continue to play in these markets.

The defect is not in the regulations around commodities. Yes, I do believe we need to regulate players and keep things streamlined. But we cannot deny mankind's needs to be gamblers. Whether it is a Chinese man in Macao, a Frenchman in Monaco, an Indian in Dubai or an American on Wall Street - Man has developed a culture of greed, a culture of excesses. And to feed this habit, he will find new ways to speculate and make large sums of money. And as long as mankind does not reform itself, we will see players using commodities such as Oil. And this will keep the third player vibrant in the markets.

 Oil may be down now. Even looking at the charts technically, it has really tried to fall below $70 per barrel and has bounced back. Unless something dramatic happens, $70 would be the new floor for Oil going forward.

I would be buying Oil to stock up on this bargain now!!!

Ashish Advani

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