Oil and the energy crisis is the ‘next crisis’

The global economic crisis hasn’t even gone half way through, but so far it has managed to drop most global indices by 20% 30%, smashed confidence that may take years to restore, revealed the slew of poorly run and badly managed companies (that have now been bailed out by the US government); consumers have been hammered globally from falling equity prices and big job losses, with more huge jobs losses to come. So it’s bad.

Oil markets have indicated how bad the global economy is, which is clearly indicated by the decline in big energy uses such as China and India, this energy use is gaged against the oil price; which has dropped from its all time high of $147 2nd June 2008 a barrel down to $35 on the 22nd December 2008. That is a 70% drop in six months. Oil clearly shows a severe price destruction so dramatic in a relatively short time span tells you how much the global economy is slowing and sharply.

The lower oil price has rebounded in January 2009, due mostly to the conflict in Palestine (Gaza) and oil cuts by OPEC in late 2008. The rebound from $35 December 2008 to $50 January also indicates the sharp spikes in oil pricing, in which the oil price is sensitive to geopolitical and US dollar decline. The other factor to watch is energy disruptions in Europe namely tension between Russia and the rest of the EU, namely gas supply problem between Russia ad Ukraine.

The global economic crisis has thrown the world into a deflation environment, so everything you can think of that has assigned value is being sold off, including energy based commodities such as oil. But energy is a critical factor in supply and demand dynamics, in a sociological sense an extreme necessity for human and society development. The supply aspect, especially with oil, is fading – take out the deflationary and economic slow down and we still have a lack of supply with oil and demand will still be high even with economic growth slumping and becoming static. Same with gas, any geopolitical, war or tension sends commodity (energy based) resources prices upward very quickly.

I discussed the potential of an oil price spike in Oil lower, volatility market reaction. Oil now showing price instability. Could the mother of all oil shocks be brewing, this was on the premise that Israel would strike at Iran’s Nuclear facilities in 2008. This didn’t happen, oil was already high at $113 a barrel and the global slump in 2008 sent oil lower. Still the potential for Israel to strike at Iran is there, if sanctioned by the US; Israel would strike Iran tomorrow. But a provocation by Iran cannot be ruled out this could occur at some point in 2009.

Some economists are now talking of a economic recovery in the middle 2009, I think that is very premature, possible demand might come back on for certain industries, hence commodity prices moving upwards. I would agree to that analysis, but the global economy is so wreaked and problematic from government interventions which is going to ensure inflation will return. Talking about recover comes from a certain angle (investment in certain industries), not from a general global economic recovery. So it is extremely speculative, especially in light of continued US dollar weakness into 2009.

But even on the talk of recovery in 2009 a lot of ‘crisis’ on the horizon are still approaching the world. The next big one will be energy.

Oil could stage a recovery into the high double digits in 2009, with it being very over sold we may see become attractive to investors on any sign of industry demand and hedging against the USD.

Please refer to graph (click on graph for larger image):

Also should be noted that general energy issues, such as Russia stopping gas supplies into Europe also puts upward pressure on the oil price.

If you looking at energy from an investor perspective is to see the potential in gains especially at such oversold prices on energy stocks, namely large oil and gas companies and the oil price it’s self.