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Some Thoughts on the Energy Commodities for 2006

Just some thoughts on the various major energy commodities - uranium, crude oil, natural gas, coal, and sugar/corn. Long-term technical trendlines and other long-term technical indicators for these commodities are still overall bullish, and there are some additional fundamental supply and demand considerations worthy of attention.

First of all, in the event that the US heads into a recession later this year due to a slowing housing market correlated to slowing consumer spending, which could likely translate into a slowing demand for energy commodities, the potential exists for rising energy commodity prices if the decline rate in supply exceeds the decline rate of slowing demand. This scenario of rising prices even in the case of a recessionary environment happened during the 1970s. In today's environment, this scenario could also be likely given the global decline rates of peak oil and if Asia or other parts of the world continue to grow as non-US consumer consumption and spending continues to develop worldwide. And this scenario could likely be the case in today's environment for declining or tight supply situations for uranium, crude oil, natural gas, and sugar - coal production has been ramping up after prices doubled recently [1], and corn is not being used as extensively as sugar in the production of ethanol as yet and has had recent associated issues relating to bird flu concerns and large overproduction yields.

Other specific considerations on the energy commodities include the following.

On uranium:

  • demand requirements for uranium are not being met by current and projected future production [2] (see this article for data on this growing imbalance)
  • new nuclear fission reactors have been recently announced by many countries including China - these reactors require uranium as fuel
  • some environmentalists now recognize nuclear energy as a relatively cleaner energy source than other forms of energy

The long-term trendline for uranium commodity prices continues to go higher in an almost parabolic fashion since 2001, as shown below (courtesy of www.uxc.com); note that the increase is steady with virtually no correction in price.

Ways of investing in uranium include but are not limited to:

  • equities of mining companies having some component of uranium mining
  • funds specializing in holding uranium supplies through forward purchase agreements or other supply arrangements

On crude oil:

  • 55 out of the top 65 top oil producing countries have now reached peak oil production and are now in production decline [3]
  • the US reached peak oil production in 1971 but continues to have growing demand requirements and now imports over 50% of its total crude oil requirements and up to 70% of its total hydrocarbon requirements [4]
  • some of the so-called oil exporting OPEC countries have either peaked in oil production and/or are now net importers (instead of net exporters) of oil
  • according to the CEO of a prominent oil services giant, the global crude oil production decline rate is hard to estimate but an overall figure of 8% is not an unreasonable assumption - this translates to a decline in oil production of about 50% within a decade...what could crude oil prices rise to in such an environment if a 5% cut in production caused crude oil prices to triple in the decade of the 1970s? [5]
  • the above considerations are in an environment of massive increasing demand in crude oil from billions of people in Asia and escalating geopolitical tensions recently in oil producing regions of Nigeria, Venezuela, Iran, and the Caspian region...

The long-term trendline continues to go higher as shown below (courtesy of www.freecotcharts.com):

On natural gas:

  • natural gas continues to be characterized by many of the crude oil considerations mentioned above; in addition, one big issue with natural gas remains its difficulty in transport and given security concerns over the establishment of liquefied natural gas terminals, the situation remains one of regional supply and demand

The long-term trendline shows higher natural gas commodity prices going higher since the fall of 2004, and the recent selloff in prices has now reached this long-term trendline, suggesting a potential buy point

Ways of investing in crude oil and natural gas include but are not limited to:

  • equities of companies in production and exploration of crude oil and/or gas
  • equities of oil/gas servicing companies
  • commodity futures or options in crude oil or natural gas
  • index-funds focused on or having a component of oil and/or gas

On Coal:

  • coal prices have recently doubled and leveled off a bit as production has ramped up (per the referenced article)

The long-term trendline in coal prices still appears to be higher per below (per courtesy of http://www.eia.doe.gov/cneaf/coal/page/coalnews/coalmar.html) since the summer of 2003.

Ways of investing in crude oil and natural gas include but are not limited to:

  • equities of companies in production and exploration of coal
  • equities of coal servicing companies
  • commodity futures in coal
  • index-funds focused on or having a component of coal

On Sugar:

  • sugar is increasingly being used by Brazil for making ethanol(used for ethanol [6]); Brazil is now exporting sugar-based ethanol at about $25 per barrel to countries in Latin America, Asia, and Europe
  • worldwide sugar consumption continues to increase worldwide

Sugar prices have tripled in the last two years; the long-term price trend appears higher as shown below (courtesy of www.freecotcharts.com ). However the recent steep run up in sugar prices suggest a correction may be warranted...this correction may bring prices back in line towards the long-term trendline per the above...some partial profit taking may be considered.

Corn as mentioned has not risen in a similar sense to these other energy commodities - however, given recent public discussions, initiatives, and increased awareness of corn-based ethanol (used for ethanol [7]), the situation for corn could present itself in a manner similar to sugar. North America currently focuses on corn in the production of ethanol.

Ways to invest in sugar or corn, sugar-based ethanol, or corn-based ethanol include but are not limited to:

  • equities of companies specializing in sugar-based ethanol or corn-based ethanol
  • equities of agricultural servicing companies
  • commodity futures or options in sugar or corn
  • index-funds focused on or having a component of sugar, corn and/or ethanol

In addition to the above considerations, it is recommended to begin considering investments in alternative energy technologies utilizing one or more of these energy commodities or in their transformation. Some developments in this regard include but are not limited to:

  • coal liquefaction
  • coal gasification
  • various clean-coal technologies
  • methane hydrate
  • hybrid nuclear reactors or nuclear fusion energy
  • other ethanol based forms - from palm oil, from rapeseed, from plant cellulose stalks of various plants, from switchgrass

[1] http://www.theaustralian.news.com.au/common/story_page/0,5744,17959237%255E643,00.html
[2] http://www.stockinterview.com/stm-bambrough.html
[3] www.financialsense.com (Financial Sense Newshour January 2006)
[4] http://www.financialsense.com/transcriptions/2006/0114blake.html
[5] http://www.lifeaftertheoilcrash.net
[6] http://www.bonneuilreport.com/page6.html and recently http://www.safehaven.com/showarticle.cfm?id=4502
[7] http://www.bonneuilreport.com/page6.html and recently http://www.safehaven.com/showarticle.cfm?id=4502

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