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Goldman Sachs Is Wrong About Commodity Prices
JT Long: Goldman Sachs delivered a dire commodities outlook earlier this year, but RAB Capital Founder Philip Richards still sees compelling buying opportunities. In this interview with The Mining Report, Richards discusses his outlook for oil, gold, vanadium, zinc and nickel, and profiles companies with projects that will see the light of day even in harsh price environments. A few of these names have doubled in stock value in recent months, and still others look poised to deliver multiple returns on investment.
The Mining Report: Goldman Sachs cut its price outlook for almost all commodities, including oil, which it said could go as low as in the high $30 per barrel ($30/bbl) range. Do you see that as realistic?
Philip Richards: I think that oil has now made a bottom. I look at Brent crude more than West Texas Intermediate. Brent bottomed at around $46/bbl and has since rallied around 30%. The reason for thinking that oil could go lower is that oil is a relatively price-inelastic commodity. That means if you have a big move in the price, you don’t necessarily get a big response on the demand side. Nevertheless, demand is picking up at these lower levels. In fact, even in the U.S., which is a material market, there has been a notable uptick in the growth of oil use at these lower prices, so oil is responding a bit on the demand side.
The other question is whether supply can move dramatically in one direction or the other. Now, Iraq is beginning to pump more oil, and may add another 1–2 million barrels per day (1–2 MMb/d) within the next two years. On the other hand, the whole Middle East is becoming increasingly traumatized, by the Islamic State in particular. There is ongoing unrest across the region, such as Shi’ite Houthi militia taking over strategic sites in Yemen. That could destabilize Saudi oil provinces, which have Shi’a Muslims, who are disaffected with the Saudi regime.
Also, about 5% of oil production drops out of the equation every year simply because reserves run out. This is a commodity with production running at around 92 MMb/d, so about 5 MMb/d must be replaced every year. With the lower oil price, a lot of investment has been curtailed, and consequently, that will slow the pace of new supply coming on-line.
Generally speaking, my prognosis would be that we are looking at oil prices slowly increasing over time.
TMR: In this range of oil prices, what oil companies could be successful?
PR: A number of oil companies had their share prices come down quite a lot. I think you have to look at the mid caps or juniors for real bargain prices. The blue chips, the big-cap stocks, didn’t come down as much.
Falkland Oil and Gas Ltd. (FOGL:AIM) has been a long-time favorite. It is just commencing a major five-well drilling program. The stock should show some upside, particularly if the oil price rises.
In the U.S., a company like Noble Energy Inc. (NBL:NYSE), which is a partner of Falkland Oil and Gas in the South Falklands Basin, is well positioned, and also has some decent production elsewhere in the world. Noble is a good example of a fairly large mid-cap stock that could do well in this range of oil prices.
If you looked into something a little bit smaller in, say, the United Kingdom, you might consider Premier Oil Plc (PMO:LSE), which has production. The share price has come off very considerably from its high. In September, the stock was at about 350 pence/share (350p/share). It’s now at only 120p. So I would think that’s a good example of a bargain stock.
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Source: http://marketdailynews.com/2015/03/18/goldman-sachs-is-wrong-about-commodity-prices/
