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Roger Wiegand: Oil to Reach New Highs by Year-End

by: The Energy Report October 10, 2008 | about stocks: BTU / MEE / OIH / OIL / USO / XLE    

The Energy Report

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Despite severe economic turmoil, demand for oil is rising significantly—in fact, it will land somewhere in the range of $150 to $157, according to Roger Wiegand, editor of Trader Tracks.

A native of Michigan, Roger has had an interest in precious metals and futures since the commodity rallies of the late 1970s and early 1980s. His background in a 25-year real estate development and construction career specialized in forward planning, consulting, and using creative skills for conceptual project thinking. His present work is focused on the precious metals, currency, energy and interest rate markets for trading on the primary American exchanges. Experience in land, development and base material projects has evolved into consulting for mining companies and analyzing those markets. He has developed longer-term ideas for finance and mining marketing doing work on behalf of private and public mining companies. Roger’s consulting work is to focus on concepts and “big picture” forward planning for mining companies. His newsletters utilize the global news, and his personal research and knowledge for expressing personal trading ideas.

In this exclusive interview with The Energy Report, Wiegand takes a close look at the untamed commodities bull and names some of his favorite buys.

The Energy Report: How does you think oil will play out in current economic scenario?

Roger Wiegand: The big sell-off during the past month or two was triggered when the funds bailed out. Roughly 50% of the CRB—the commodities index—is in oil. When oil moves, it moves the index. The sell-off brought oil down from a high of $147 to roughly $90. It bounced back up to $108 to $110; $108.50 is a good support and resistance level for oil today. The next price up should be $112.50, then $122.50, followed by a couple of more increases. I think the top is going to be $150 to $157. That was our forecast.

Since our initial discussion, oil prices dropped further into the $80s on credit crisis-related problems. Analysts and traders view this recessionary onset as bearish for oil prices as business and commerce worldwide slows down. While this shorter term selling is cause for concern, we still expect crude oil to come back with a rush when the stock market is propped and recovers for the elections. Since this latest selling event, OPEC had an emergency meeting to discuss reducing production to prop prices. In our view they will do it.

For the past two to three weeks, Goldman Sachs has had two prices on oil. The general analyst group, which covers all the markets, says oil will top out at $140. But the commodities division—and these guys are the smartest of the group—is holding fast to their $149 price by the end of the year. This price doesn’t take into account any potential problems in the Middle East, or any hurricanes—either of which could affect oil prices between now and the end of December. So these analysts are forecasting a price that’s very close to my forecast, of $150 to $157 by the end of 2008.

TER: That’s quite a move up from where we are now.

RW: It is. A lot of that increase is inflation related, and lot of it has to do with diminishing supply. We’re currently running at a shortfall of about two million barrels a day worldwide. Demand has fallen somewhat because of high gasoline prices in the U.S., but those prices are starting to come down a bit. The supply/demand picture has been further confused by hurricane Gustav. When Gustav shut down a number of oil refineries and natural gas facilities, oil prices dropped because refineries couldn’t buy oil from the oil producers. At the same time, hedge funds were getting out of oil. All of this contributed to lower prices. What happens next? Inflation is going to be big next year, not only in the U.S., but also worldwide—and that will lead to higher oil prices.

TER: How high?

RW: Charlie Maxwell, in Barron’s, says $300 oil in about five years—that’s the long view. Inflation adjusted, he’s probably right. I think we’re only about halfway into the commodity bull market. Despite the credit problems in the U.S., Asia is not going to be economically buried to the extent that we are. And that’s a continuous growing market for gas and oil. Even among the oil and gas exporting nations in the Middle East, there are countries like Iran that oddly enough have no refining capability. They have to import all their gasoline. Iran is trying to solve that problem by building two new refineries. China’s building more domestically. Kuwait offered to build a $6 billion refinery in the U.S. and we foolishly declined. This complex is now underway in China.

TER: We’re in a recession right now, yet that doesn’t seem to be affecting demand.

RW: You would think that the demand worldwide for energy products would be off in a recession. However, the demand growth side in Asia and India has risen significantly. The net result is that demand is not only holding; it’s growing. On top of this growth, we have a shortage of refining capacity. Using the barrel model set out by the CEO of Shell Oil, gasoline comes off the top of the barrel. Heating oil, diesel, and jet fuel come out of the middle, and the lower grades from on the bottom. The middle-of-the-barrel prices are holding fairly well and we see them going higher simply because of lack of refining capacity. About 35% to 40% of the gasoline coming into the U.S. is not refined here; it’s refined overseas and it comes in as a finished product on a tanker. That, to me, is an Achilles’ heel for the U.S. If we start having problems importing refined gasoline, we’ve got big trouble. So that’s a key part of the puzzle. But for now, the combination of increased demand, a shortage of refining capacity and inflation will force oil prices up.

TER: You were also intrigued with natural gas when last we spoke.

RW: We had a price drop here about 12 to 18 months ago, where natural gas really took a dive. It fell from $12.14 to $5 or $6. But we had a mild winter, the supply kept coming and it had to get back into balance. Now the balance has been achieved. The price has climbed back to $7 or $8. A very cold winter, which is in the forecast, will drive natural gas a lot higher again. And, inflation is at work here, too.

TER: Heating oil prices, especially in New England, where it’s too rocky to install gas pipe, have doubled. When you factor in inflation—increases in the cost of food, gas, and heating oil—couldn’t that push us into a depression? What happens if people just can’t afford to pay for food and heat anymore? Won’t demand for oil drop along with prices?

RW: I think prices will come down, but I don’t think they’re going to drop to the floor.

TER: If the U.S. goes into depression, how will that impact growth in countries like China and India?

RW: I think it’s going to be a disaster for those countries because much of their credit is tied to our New York banks. China’s direct sales to the U.S., which are already slowing, would fall off dramatically. And many of the products that Japan sells to the U.S. are manufactured in China—so both countries would suffer. If the U. S. sinks into a depression, the winners in the stock market are Sam’s, Wal-Mart, and McDonald’s—that’s where people will shop when they downsize their spending. However, those nations are growing markets domestically, which should help to carry them through and support commodity imports.

TER: You said earlier that continued growth in Asia would spur demand for oil. What happens if a depression in the U.S. throws China, India and others into recession? Do we still have a commodity bull market?

RW: I still think you’re going to have a commodity bull market in that case, but it’s not going to have near the strength that it had before. The critical things to watch are copper prices—because most of the copper is going to China—and crude oil. China has a big enough building-buying machine within the country to sustain ongoing growth. India may be a little more vulnerable because of its unique problems. The key point here is a China-India energy slowing not a depressive complete stop.

TER: Are you recommending any oil or tar sands, or alternative energy plays?

RW: I have one right now, Empire Energy Corporation International [OTCBB:EEGC], which I consider a wildcat deal at $.15 a share. Empire’s property is on the island of Tasmania, off Australia. This little company has some fabulous geology and, in fact, the previous owners of the property spent between $10 to $15 million doing the preliminary work. If Empire can work around some management issues, there’s backup financing waiting in the wings that can step in for help. The first well is now being drilled.

TER: Any coal companies?

RW: The coal companies, despite the fact there is a global supply shortage, are going full bore. Their prices are coming off a little bit lately but I think that has to do with the credit crisis and finance more than demand. But Peabody Energy Corp. (NYSE:BTU), Massey Energy Co. (NYSE:MEE), and two or three other large coal companies look good.

TER: What about agriculture?

RW: The corn biodiesel craze, in my opinion, was nothing more than a ploy by the government to drive up corn prices for farmers. It worked, but it’s finally going away. A lot of these plants can’t make money now. The math just doesn’t work, because of the high cost of fertilizer, seeds, and diesel fuel to run the equipment.

We’ve made a lot of money on the soybean trade early this year. We recommended small traders take their profits, which they did. They made well over 100% on the trade in just two or three months. Those with multiple positions, myself included, we said sell half and hold half, thinking we were going to get a higher price this fall. But the sell-off in the commodity funds gave us a whack and knocked our second trade leg bean prices way back. So it looks as if the second leg of our soybean trade is going to be worthless. The net outcome is that we broke even, or made a small amount, but we didn’t make the larger gain we expected. Next year I think we’ll see soybeans at $20 a bushel, which is crazy. With inflation and the demand for food and the cost of energy and fertilizer and seeds, I think that’s where it’s going. And, of course, because of the interest in bio diesel fuel, we won’t see anymore $2.50 corn. It’s now $5 or $6 and we predict $6 to $8 by the end of the year. We hit $8 in July, but the price pulled back on the credit crunch. Food prices are high, and only going to go higher.

In summary, the commodity bull market remains in play and we forecast it continues for at least another six to ten years. The structural bull market demand will not disappear especially in Asia, Russia, parts of Europe and sections of South America. Canada’s western provinces should continue to do well, along with Quebec mining. Ontario, which is tied to the U.S. with manufacturing, will undergo the most recessionary pressures.

When the credit crisis hit and those funds sold out major commodities positions they sold it all. Most of these funds were long only and internal selling was triggered as investors demanded redemption. The key point here is that not all of that money is gone but on stand-by. New reports also tell us the redemptions were not as widespread as first believed. Yes, the selling event was a cascade and sold down commodities with speed, but many funds remain invested waiting for prices to base and begin new rallies.

The U.S. dollar was the key driver component of gold and silver prices as well as the other commodities. When Europe and Asia skidded lower, the dollar stood still and those other currencies sold down around it giving the dollar the appearance of a new rally life. Risk, credit and finance are new pressures on the commodity market players, but food and energy of all kinds should continue to rise with inflation and providers of those commodities should recover and return in new bull markets.

The world has not ended. However, it certainly endured a terrible negative event. We think the sun shines tomorrow and better days are ahead for those in the correct markets.

Disclosure: Mr. Wiegand has some positions in stocks mentioned

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This article has 18 comments:

  •  
    Oct 10 04:34 AM
    Is this man serious...no really...is he serious??? He even admits that the US might endure a severe recession/depression that drags down emerging markets in Asia, but then says oil demand will continue to rise regardless of economic growth...It's people just like this who blindly hold to a idea (like the notion that housing could never fall) and allow themselves to lever 30:1 and collapse the banking system. I can't believe this person actually sucks up oxygen that the rest of us in America need. THIS MAN NEEDS TO GO!

    Riddle me this BATMAN? If all of these hedge funds are going under and are being forced to sell their oil positions...then who pray tell will be going long crude oil when the dust settles? I-banks...whoops none of them left; pension funds...i think they've learned their lesson...who...i repeat...who will be in a position to build long positions in an environment of global deleveraging and asset deflation.

    Sure the US and RoW are printing money like mad to try to re-inflate the sytem, but as we exist in a fractional-reserve banking system this really isn't creating inflation because the banks aren't lending.

    Once again, this man is sick...I could see how you could argue for 100/bbl by year's end, BUT 157/bbl...It's almost like some analysts get paid based on the degree of ridiculousness in their reports. I challenge this man to put his entire net worth in January 140 call options on WTI crude oil. If he's right he makes out like a bandit and if he's wrong (but wait he shouldn't because the system can collapse and oil demand will never go down!) then he loses everything and we can stop wasting our time clicking on links to his interviews.
    Reply
  •  
    Oct 10 04:45 AM
    By the way, DOE just reported that US use of petroleum products dropped to 1999 levels over the past 4-week period. I realize that facts can be inconvenient sometimes, but there's really no way to ignore demand destruction at these levels. Lots of price predictions in the above interview, but a conspicuous lack of supply/demand figures other than the T. Boone pickens slogan of 85 mbd production with 87 mbd demand. NEWS FLASH econ101 says that price adjusts to equilibriate supply and demand. If demand was really outpacing supply by 2 mbd we would be drawing down inventories at record pace.
    Reply
  •  
    Oct 10 04:51 AM
    "The supply/demand picture has been further confused by hurricane Gustav. When Gustav shut down a number of oil refineries and natural gas facilities, oil prices dropped because refineries couldn’t buy oil from the oil producers"

    I think somebody is trying to pull our leg cjct.
    Reply
  •  
    Oct 10 07:43 AM
    This guy is nuts. He has no facts to support these claims. Every other article says how demand is dropping off and supply is increasing. Furthermore, oil at $147 helped start the meltdown. Running it back up there would cause a revolution. I'm making money shorting it till below $80 and will see what the numbers show then. Wait till gas prices catch up with oil price slide and see where the demand is. If demand is still dropping, keep shorting.....
    Reply
  •  
    Oct 10 10:03 AM
    I have been involved with oil and oil companies since 1975 when I went to work for Amoco. The history of OPEC is a complete inability to sustain high oil prices. True, OPEC had in the past un used production leadfing to cheating but the point is the same. OPEC needs as much money as they can get their hands on. Development projects delayed could lead to civil strife as many of these regimes are buying off the populace, ala Saudi Arabia, Algeria and Iran and Venezuela. Historically, OPEC hasn't been able to sustain high pricing.
    However, OPEC is good at dragging low prices off the floor but only after several years of effort amongst its members.
    $149.00 barrel oil? I want 10 pounds of what the Goldman guys are smoking.
    Reply
  •  
    Oct 10 10:10 AM
    Better yet, make it 20 pounds, this could be a long lousy market. Anybody see China's electrical demand figures, down they are.What's the backbone of the Chinese Treasury, T-Bonds, CDO's, sub prime debt and exports to the USA, which are down as in down large. Just ask the Mayor of Long Beach California, he keeps numbers on this stuff.
    Asia will revatalize itself, but not until they go through export hell.
    Reply
  •  
    Oct 10 10:55 AM
    WOW, this guy is smoking CRACK...

    We'll see $45 oil before we see $157..!!!!! What was oil just last year?? Ahhhhh, $64... So between last year and now the supply/demand has gotten THAT out of wack with the worldwide economy on its backside.. They PAY IDIOTS for this kind of advice, no wonder the world is in such a terrible shape..
    Reply
  •  
    Oct 10 11:29 AM
    Hmmm., spoke too soon. Oil just broke $80.... Maybe I''ll wait till it breaks $50 before I stop shorting oil....
    Reply
  •  
    Oct 10 12:09 PM
    mangolfer:

    I just shorted some more DIG & USO.. I'm already ahead..LOL..!!! A blind man can see whats coming.. All metals and ag-commodities are crashing along with EVERYTHING else... This is taking it ALL down.. He's the biggest MORON I've ever seen..WOW..!!!!!!!!!!!...

    Oil's been retreating around $2-4 a day for a while. At that rate in 10 days we get to the promised land..LOL..!!!!!
    Reply
  •  
    Oct 10 12:42 PM
    i am not in the business of making predictions but for those expecting further drop in oil consider that the costs to extract oil continues to increase such that lower prices can affect supply. In short, just as high prices elicit demand destruction, low prices elicit supply destruction. Perhaps coming weeks we'll find a balance. It's probably closer to $90-100.
    Reply
  •  
    Oct 10 04:53 PM
    he's a real-estate developer but he's trading commodities!?!? enough said.
    Reply
  •  
    Oct 10 09:42 PM
    Yeah, this guys is having lunch with the idiots at Goldman Sachs and is drinkng the same kool-aid. Remember, GS is responsible for the excessive commodity bull market with the promotion of their GSCI which they really got moving in late 2005. Their "analysts' are anything but independent are are in business to 'predict' the self-fulfilling future that their trading departments demand of them...Interesting how many fools follow thier nonsense - like MS and JPM and AIG - BTW are all these guys either under are headed that way...do no think for one moment that it was all bad paper that these WS firms were holding that were draggin g them down, they lost their shirts this summer and last/this month when their view of the world (ie. commodity prices) caused us all to go off the cliff....The Saudis have stated all year that $88 oil is what we should have and this is where they will prop it up by the end of the year if OPEC prevails...and all that sideline money - it ain't rushing back into commodities...plus we are going to have position limits...So, look at the source of the article and the sources he is using to support his predictions...he is hoping it will will go up becuase he went long in June for 6mos..Buh Bye!
    Reply
  •  
    Oct 11 10:27 PM
    What everyone is forgetting here is that the monster of hyperinflation is coming next year and commodities will go through the roof. The Fed has no choice but to print more money out of thin air.
    Read here:
    www.chrismartenson.com...
    Reply
  •  
    Oct 12 01:49 AM
    Roger does extensive research and has a great track record.
    Reply
  •  
    Oct 13 06:05 AM
    Sorry, but you guys are all completely in the dark.

    All this talk of "all the other articles say" are irrelevant.

    I know Roger Wiegand personally, and he is probably one of the best traders I have ever met. His knowledge is incredible. He knows the commodities markets inside out (and for the guy who commented on him being a real estate developer, that was his former job---he is now a full-time trader and newsletter writer).

    What you guys fail to realize is that oil already HIT incredibly high levels this year. Was that due to your fundamentals?? Have fundamentals changed that much since the summer? No. They haven't. If you think the global credit crisis is a new thing that came about in the past 3 weeks, you need to read more. We are still going to see an incredible price rise in oil.

    The fact of the matter is, the only issue that counts for oil is PRICE. Price is the only thing that talks.

    And there are several major factors at play here.

    Oil is DOLLAR-based. Watch the dollar slide soon, and send dollar-priced commodities sky-rocketing. Then, any mention of Iran in the media and oil will SOAR.

    Please come back and post your apologies on this site if you are proven wrong later.

    No one can ever predict the future, but this guy does a phenomenal job, month after month after month. He is also one of the best technical analysts out there.

    Furthermore, if you look at a chart of oil and trace the trendline, we are at a bounce point on the upwards trendline, heading into Elliott wave 5. That points to a price of oil near $220 probably sometime next summer.

    You criticize this guy for having no knowledge, but you don't provide strong arguments of your own. It is all technical analysis. and we may correct to around $72 in oil, but the support there is so strong, watch out for massive oil spikes.

    But good luck to everyone. Be prepared. The markets are not what you think they are, and reading Bloomberg and watching CNBC are not designed to help you find out the truth.

    Sq.
    Reply
  •  
    Oct 14 01:34 PM
    I'll give you some data points...US demand for petroleum products down to levels not seen since 1999...Chinese stock market off 60% indicating a worldwide slowdown (no such thing as decoupling). And the marginal barrel to produce costs like $70 according to Saudi Arabia's oil minister.

    And you can't use that "what's changed since it was 150/bbl" line either, because 1) a lots changed as the wall street crunch has damaged the real economy and 2) nothing changed between 2007 and 2008 when oil more than doubled!
    Reply
  •  
    Oct 15 12:42 AM
    I talk with Goldman Sachs on a weekly basis; this guy has bad information. GS never said oil will be at $140. For the last three months, and even now, GS says oil by the end of 2008 will be $80... not monumental. This guy needs to provide the source of the individual at GS. This is incorrect data he is spouting.
    Reply
  •  
    Nov 03 06:45 PM
    BRAVO!!!!


    On Oct 10 12:42 PM akapital wrote:

    > i am not in the business of making predictions but for those expecting
    > further drop in oil consider that the costs to extract oil continues
    > to increase such that lower prices can affect supply. In short, just
    > as high prices elicit demand destruction, low prices elicit supply
    > destruction. Perhaps coming weeks we'll find a balance. It's probably
    > closer to $90-100.
    Reply
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