T2W Trading Community

We believe the various oil price corrections that have occurred over the past two years are symptomatic of the behaviour which occurs in a primary bull market. In such times the bulk of participants, previously conditioned by a bear market, generally consider a period of advancing prices to be unsustainable. They head for the exit, only to return after contemplating the unrelenting fundamental market drivers in place.

Over the longer term, and as part of a diversified portfolio, we recommend Members maintain exposure to the energy sector. On the flip side we remain wary of large exposures to industries which use significant amounts of oil in the production process. Margins will suffer if companies are unable to pass on the ever increasing high costs of fuel.

And let's not forget the US dollar, which also helps explains why the price of oil has been rising. The world is awash in US currency. Too many US dollars seem to be chasing too few commodities these days. We believe the rise in the price of oil over the past few years is partly due to the US dollar losing purchasing power.

While reluctant to use the phrase, 'this time its different', we believe the reality is that cheap oil is a thing of the past. The world has located most of the large scale, near surface deposits, and many major oil fields are entering long term production decline.

There is still plenty of oil left in the earth's crust. The problem is the most accessible deposits are depleting and the cost of extraction is increasing. The Canadian oil sands deposits in Alberta hold more reserves than Saudi Arabia, but the costs of extracting such reserves are far higher. Economic logic dictates that the market price for oil will therefore remain high.

A break above US$74 will indicate renewed upward momentum and a likely re-test of the April all-time high. We maintain our view that levels beyond US$100 per barrel are achievable in the years ahead.

The Fat Prophets Portfolio contains a diversified exposure to the energy sector. For Members without exposure, we intend to continue recommending quality oil stocks during periods of consolidation and correction.