Case for Sus­tained $100 Oil

By Frank Holmes, CEO and Chief Invest­ment Offi­cer, U.S. Global Investors

In 2011, oil was one of the top per­form­ing com­modi­ties among those we track, with Brent ris­ing more than 13 per­cent. Geopo­lit­i­cal risk and unex­pected non-OPEC sup­ply losses caused oil to rise sig­nif­i­cantly in early 2011. By Octo­ber, we saw the black gold sink to a low of $80 per bar­rel before ris­ing to its cur­rent level of nearly $108 a barrel.

This year’s unrest demon­strated how major oil-producing regions can sig­nif­i­cantly affect oil prices. As I’ve pre­vi­ously stated, accord­ing to PIRA, the Mid­dle East accounts for over 70 per­cent of OPEC oil pro­duc­tion and, along with North Africa, more than 95 per­cent of the cartel’s capac­ity growth.

A dis­rup­tion of the sup­ply chain can also influ­ence oil prices. One of the largest choke­points along the global oil sup­ply chain is the Strait of Hor­muz, which roughly 90 per­cent of all Per­sian Gulf oil tankers—some 18 mil­lion bar­rels per day—pass through, accord­ing to Bar­clays. With Iran con­trol­ling the entire north­ern bor­der of the strait, there is a sig­nif­i­cant chance for dis­rup­tions should the coun­try fall into con­flict or war.

The story will likely con­tinue into the new year, as “sanc­tions against Iran, includ­ing a pos­si­ble Euro­pean Union oil embargo, and fear of an Israeli attack on Iran’s nuclear facil­i­ties led 2011 to close on a bull­ish note” for oil, said PIRA Energy Group in its new report today. Addi­tion­ally, there’s new polit­i­cal uncer­tainty in Iraq that may keep oil elevated.

The chart below sums it up: With more than 40 per­cent of the world’s oil con­trolled under auto­cratic rule, oil sup­ply in demo­c­ra­tic nations likely depends on the state of auto­cratic nations.

Read The Many Fac­tors Fuel­ing a Return to $100 Oil

China Rises to Top of Energy Pyra­mid
Another sig­nif­i­cant devel­op­ment in 2011 was that China sur­passed the U.S. to become the world’s largest energy con­sumer. BP’s Sta­tis­ti­cal Review of World Energy report cal­cu­lated that China’s energy con­sump­tion rate grew 11 per­cent over the pre­vi­ous year, with the coun­try con­sum­ing 20 per­cent of global energy.

Read China is World’s Largest Energy Consumer

While coal accounts for a sig­nif­i­cant por­tion of China’s total energy use, the country’s need for oil should con­tinue to rise. Its ris­ing income lev­els, the government’s social hous­ing plan, and an aggres­sive trans­porta­tion effort to link 700 mil­lion peo­ple across more than 250 cities should con­tinue to drive this growth. Bank of America-Merrill Lynch agrees, sug­gest­ing that “China’s oil depen­dency will rise as U.S. imports fall.”  In the chart below, it’s pro­jected that China’s imports of crude oil and petro­leum prod­ucts will sur­pass the U.S. in 2014. BofA-ML thinks that on a vol­ume basis, China oil imports “will grow quite rapidly on the back of rapid per capita income growth.”

China’s demand is what makes today’s oil sit­u­a­tion dif­fer­ent from the end of 2007. At that time, a lack of sup­ply increased oil prices even though the U.S. was in a reces­sion. What’s dif­fer­ent is that “China is likely to re-accelerate” in 2012, accord­ing to Gold­man Sachs.

China, along with other emerg­ing mar­kets, and the Euro­pean Cen­tral Bank are in the early stages of a global eas­ing cycle, pri­mar­ily by cut­ting inter­est rates to spur growth. Also, the Fed­eral Reserve should remain stim­u­la­tive. These gov­ern­ment actions set the stage for sus­tained, or per­haps higher, demand for oil. As stated ear­lier, geopo­lit­i­cal threats remain on the hori­zon, and could also be a pos­i­tive cat­a­lyst for oil.

As always, our team will closely fol­low these events, as well as the mon­e­tary and fis­cal poli­cies, to find global invest­ment oppor­tu­ni­ties in 2012.

We wish you and your fam­ily a very happy and pros­per­ous new year!

John Der­rick con­tributed to this commentary.

Frank Holmes is CEO and chief investment officer of U.S. Global Investors, Inc., and a Toronto, Canada native, which manages a diversified family of mutual funds and hedge funds specializing in natural resources, emerging markets and infrastructure. The company’s funds have earned more than two dozen Lipper Fund Awards and certificates since 2000. The Global Resources Fund (PSPFX) was Lipper’s top-performing global natural resources fund in 2010. In 2009, the World Precious Minerals Fund (UNWPX) was Lipper’s top-performing gold fund, the second time in four years for that achievement. In addition, both funds received 2007 and 2008 Lipper Fund Awards as the best overall funds in their respective categories. Mr. Holmes was 2006 mining fund manager of the year for Mining Journal, a leading publication for the global resources industry, and he is co-author of “The Goldwatcher: Demystifying Gold Investing.” He is also an advisor to the International Crisis Group, which works to resolve global conflict, and the William J. Clinton Foundation on sustainable development in nations with resource-based economies. Mr. Holmes is a much-sought-after conference speaker and a regular commentator on financial television. He has been profiled by Fortune, Barron’s, The Financial Times and other publications. Read more from the author/contributor here.

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