My inbox receives a lot of junk email promoting investment newsletters; most such email gets discarded without review. A recent piece caught my attention, perhaps because the claim seemed so bold — $150+ oil by mid-year. The claim (by Kent Moors of Energy Advantage) was backed-up by the writer’s research showing that if oil prices fall to such low levels so as to make drilling new wells unprofitable (like at the end of 2008), for every week that the number of drilling rigs in operation remains below average (following the bottom in oil prices), it takes 2.5 weeks for that missing drilling capacity to come back on-line. In the case of the oil bear market which bottomed at the end of 2008, oil drilling remained below average for about a year thereafter, until the end of 2009. The key observation is that you can forecast the timing of a future peak in oil prices by multiplying that below-average drilling year by 2.5 and adding that time chunk to the beginning of 2010 to project a peak in oil prices by mid-year 2012, plus or minus three months. The rise and peak in oil prices arrives due to a predictable supply deficit. Below is a chart of light crude oil prices over the past five years.
The bottom line –financial assets related to oil should outperform into mid-year 2012.