one of the greatest “toys” I ever got was a simple slingshot. Basically, a wooden handle in the shape of a “Y”, and a durable rubber band that was connected to the top 2 ends of the wooden handle. Simply by placing a rock (or anything) on the rubber band and pulling back, you could hurl the object hundreds of feet with tremendous force. The more you pulled back, the greater the reaction when you let go. And in today’s economic environment, I believe we’re seeing the market pull back on a few slingshots that are going to react in a MAJOR way. And much like a slingshot, you can only hold the elastic back in full stretch for so long before you can’t hold it any more (because you tire) and it releases. This perfectly describes where I believe things are with several critical commodities, but the one that fits this analogy best right now is oil. As I write this, we’re watching oil drop down to levels that I, quite frankly, did not believe we would see, even a month or two ago. I couldn’t have appreciated the depth of the economic mess we’re in right now, but the fact is that it’s here — oil is trading in the range of $55/barrel, down more than 60% from where it was only a few months ago. The result has been not only an easing at the gas pump (which most consumers take as good news), but a collective re-thinking of oil exploration projects that represents hundreds of billions of dollars in expenditures. The logic goes that if oil remains low, it becomes uneconomical to proceed on many of these major oil initiatives. We’re seeing almost on a daily basis, here in Alberta, announcements that companies are placing projects on hold, or delaying the start of projects until there’s more certainly with regard to future oil prices. The fear is alive and well, just like in all aspects of the economy it seems. The problem with all of this is that the long-term demand for oil is not going down, it is going UP. Existing oil reserves are declining. No matter how you slice it, we’re going to need MORE oil in the future, not less. Aside from all the demands and promises we’ve seen through the U.S. elections, the fact remains that the U.S. is going to be a major consumer and importer of oil for many years to come. Even if they passed the new rules allowing off-shore drilling today, it would be 10 years before they see their first drop of oil. So in the context of today’s economic crisis, it makes sense to proceed slowly on oil development and new projects — but what this is contributing to is an even greater oil shock that’s coming somewhere down the line. Just like pulling a slingshot back as far as you can, cancelling or delaying projects intended to bring new oil reserves online are going to have the exact same impact. Once the current intensity of the economic problems facing the world begin to subside, and the world goes back to daily life and we see some growth return to the global village, the demand for oil again will become front and centre. And when that happens, just like letting the slingshot elastic go, you’ll watch as oil takes a massive run upwards, just as it did this year — except, I believe this next leg is going to be even more explosive than what we witnessed in oil going to over $147. When is this going to happen? Well, that’s the billion dollar question. What it will take is for the global economy to regain some stability, and for confidence in the economy and markets to begin coming back. If we see any more major unforeseen economic events in the next few months (which we certainly can’t rule out, because it is VERY unstable out there), then it could take many months, or even a year or two for this to occur. However, my bet is that 2009 will see triple digit oil prices yet again, and we’ll see oil move towards new record highs, because delaying or cancelling projects today is going to have an impact on supplies in the long-term. So, don’t get used to $55 oil because I don’t think it’s going to last more than a few weeks, or possibly a few months at the outside (and in my mind, that is a stretch). While it’s hard to believe right now that all of our economic problems WILL pass, the fact is they will, and I can assure you, we’ll be watching this slingshot response occur to oil, along with gold and other commodities as well. In my opinion, the commodities bull market is NOT over, and you’ll know that’s true when you hear the “snap” of the slingshot being let go and watching the result.]]>