Email of the day
Comment of the Day

August 25 2011

Commentary by David Fuller

Email of the day

On oil and rice prices:
(1) Due to technological developments for shale oil and shale gas, do you think the price prospects for crude oil and natural gas beyond only 5 years from now, is not so bullish? I currently hesitate to invest in those 2 commodities for such a reason. I have seen your opinion that it would be another 12 - 20 years before those two are expected to be widely produced worldwide, but the anticipatory nature of markets may see the dampening of crude oil price perhaps 7 years from now (instead of the minimum 12 years)?

Anyway there is a risk that things may move much faster due to further technological progress. Perhaps investors should avoid being long on commodity ETFs that have a high component of crude oil and natural gas in them?

(2) For agricultural commodities that are the staple food of many of the poor in the world (e.g. rice), would the price rise be limited by say government action? Or governments can't do much to the price except to subsidise (rice) for their poor (and the free market's price for rice can go very very high)? If the first case is true, then there would be not much upside for such commodities unless they are at historically very low levels (nominal or real).

David Fuller's view Thank you for these astute points and questions, which are likely to be of interest to many subscribers.

Fullermoney maintains that both shale gas and shale oil are game changers. The investors' question is: how do we profit from this situation?

I agree with much of what you say about future energy prices. As evidence, we already see how much lower prices for natural gas and crude oil are in the USA, relative to Europe and Asia. I attribute most of this to the rapid development of shale properties.

I think the major developers of these properties globally should do well, not least as demand for energy will almost certainly grow over the longer term. However, if Fullermoney's view that the world will have abundant energy at some point in the next decade is correct, and it will cost less in real terms than what we see today, the main beneficiary will be the global economy.

The global economy is currently in a difficult phase in terms of energy supplies and costs. This reduces GDP at a time when the west is struggling with the hangover from its credit excess and debt crises. It will take at least a few more years to resolve these problems. Thereafter, I maintain that we will see evidence of the growth supercycle forecast by Standard Chartered. So far, this has been limited to the Asian-led growth economies.

As for commodity futures ETFs, we do not like them because the contangos devour potential returns.

Regarding point (2) in the email above, some governments may subsidise rice or other commodity prices but if they have to import the food in question, they have to purchase it in the open market.

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