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The Edmonton Journal: Is it time for the wise investor to cut and run?

EXTRACT: Moscow’s recent mugging of Royal Dutch Shell and ExxonMobil will trigger an investment chill by Big Oil…


Dismal start to 2007 may not be the template for tomorrow 
Gary Lamphier
Saturday, January 06, 2007
Is the party over? I doubt it. But after sustaining hefty losses this week, investors have every reason to wonder whether the commodity-driven, four-year-old TSX bull market cycle is history.

With energy, gold and metal prices in retreat for much of the first week of 2007, Toronto’s S&P/TSX Composite Index shed 430 points or 3.3 per cent, including 75 points Friday.

The equity benchmark, which ended 2006 at 12,908.39 — a hair below its record high of 13,042.77 — closed Friday at 12,477.97. That marks its sharpest weekly loss in half a year.

Not exactly a thunderous confirmation of all those glowing market forecasts we read at the end of 2006, huh?

The culprits? Take your pick. Gold tanked Friday, dropping $19 US an ounce to close below $607 on the New York Mercantile Exchange. Why? An upbeat U.S. jobs report strengthened the outlook for the greenback. That’s bad for gold prices.

Copper was also thumped. Again. Prices for the widely used industrial metal fell 12 per cent on the week, to $2.53 a pound. Since hitting a record high of nearly $4 last May, copper prices are off about 37 per cent.

Why? Rising stockpiles. Blame it on the lousy U.S. housing market. Not to mention the troubled U.S. auto sector. Both use tons — er, tonnes — of the stuff. Now they use less.

Oil and gas prices also got whacked. With El Nino extending the golf season throughout much of North America, making a mockery of winter, the short-term outlook for heating oil and natural gas looks awful.

Result: despite a modest uptick Friday, crude oil prices fell nearly five bucks this week, to $56.31 a barrel in New York. Oil is now now roughly $23 or 30 per cent below the record highs of last summer. Hasn’t been this low in 19 months.

More good news: With inventories bulging, natural gas futures closed Friday at $6.18 per million British thermal units (MMBtu). A year ago natural gas was at $9.50. Not long before that, it touched $14. Some bull market, huh? Who’s driving this train anyway?

Well, before you throttle your broker, you might want to hit pause. Scotia Capital commodity analyst Patricia Mohr says the end isn’t nigh. Far from it.

In fact, other than a bit of tinkering on her copper price estimates, she hasn’t changed any of her bullish projections for 2007.

Mohr doesn’t track one commodity. She follows 32 of them. Everything from uranium, zinc and copper to gold, oil, natural gas and lumber. Plus a couple dozen others. It’s a long list.

As of mid-December, Scotia’s commodity index was still hovering near the record highs of last May. For 2007, she figures oil will average about $60, natural gas will hover around $7, and prices for most metals — notably zinc, nickel and uranium — should be exceptionally strong.

So when you ask her if this week’s 430-point haircut on the TSX and the attendant drop in commodity prices means it’s time to panic, her first response is to laugh. Then she methodically dissects the bears’ arguments.

Low energy prices? Blame it on El Nino. It, too, will pass, she says. All those geopolitical worries that drove oil to the high $70s last summer will resurface, she predicts.

Iran’s nuke ambitions are just part of the equation. Mother Russia is another, she says. Moscow’s recent mugging of Royal Dutch Shell and ExxonMobil will trigger an investment chill by Big Oil, she predicts, hindering further exploration, development and production growth in Russia.

OPEC is also bound to curtail output further, she says.

That’s not only good for oil prices. It will also support natural gas prices, she says. Eventually — after current surpluses are wound down.

In fact, the current weak gas prices are already curtailing drilling activity in Western Canada, which will reduce supplies next winter.

Mohr is also hot on nickel, which is used to make stainless steel, which is in high demand globally to make everything from refineries to aircraft. The stuff currently sells for $15.79 a pound, within a stone’s throw of its recent all-time high. She sees nickel’s current “super cycle” continuing through 2008.

Uranium and zinc top her list of faves for 2007, however. At $72 a pound in mid-December, the uranium spot price was up nearly 100 per cent, year-over-year. But Mohr sees uranium hitting $90 by the end of 2007, as utilities shift away from high-priced fossil fuels, and China ramps up its nuclear power program.

As for zinc, it’s less affected than copper by the slowdown in U.S. housing and vehicle manufacturing. And since China consumes a lot more zinc than the U.S., it’s a far more important factor anyway.

Globally, zinc demand continues to outstrip supply, and stockpiles are down by nearly 80 per cent since the end of 2005. No wonder zinc prices hit a record high of $2.10 a pound in November.

Mohr expects the uptrend to continue, at least until new mines open later this year and in 2008.

So there you have it. Yes, it’s been a tough first week for commodities.

But this story ain’t broken. Not yet anyway. Will the TSX match the 14.5-per-cent gain of 2006? Not likely. But Armageddon still looks a ways off.

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2 Comments on “The Edmonton Journal: Is it time for the wise investor to cut and run?”

  1. #1 Larry
    on Jan 7th, 2007 at 01:24

    So maybe involving Gazprom (its happening now) would slowdown tinkering of Russia to Shell and ExxonMobil business in Sakhalin, huh.

  2. #2 Deborah
    on Jan 6th, 2007 at 19:45

    I found this interesting. I would have like to have seen more on the reasoning behind the beliefs on commodity prices, like how gas was explained, and I would liked to have seen more references to international markets as I think commodities are a global thing.


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