$17 OIL

Last July, near the $147 oil & TSX 15K high, I put out an outlandish target of $60 oil and TSX 9000. Ultimately, in the depths of the winter despair, oil hit $33 and the TSX 7,500.

Now that we are about 100% up in oil ($74 was the high) and the TSX has rallied to 11K, and the bulls are strutting, I wanted to put this out.

Even prominent bears such as David Rosenberg believe in the commodity super bull market. He points that even at the lows of 2008/09, all commodities had higher lows than earlier in the decade (2001-2003). Take oil for example. It bottomed at $17 in 2001. It bottomed at $33 earlier this year.

My problem with that view, is that it assumes that those lows will hold. (And they might).

I take the view that the credit bubble that inflated profit margins, housing values, stock market valuations also inflated commodity demand. You could make the argument that things are worse today for the economy than back in 2002/03. Therefore, demand does not necessarily support prices at $74 let alone $33. I understand that BRIC demand is way up since then, but that does not compensate fully for the drop in G7 demand, nor does it preclude a continued drop in BRIC demand as their exports continue to get smoked. Also, the commodity boom allowed tons of supply to come on stream making supply much higher than it did back in 2002/03. Throw in all the consumers that got religion on energy conservation from years of high prices and the green movement. Heck, even I just bought a front load washer because I calculated that it will save me some money over its lifetime. SUV demand is not coming roaring back despite the 50% drop in oil prices. Companies are looking to cut costs, including energy costs.

If we are in a sustainable recovery, then I agree, forget about $17 oil. If we are in a L or W shaped economy, then $17 oil should be on the table. Even back in the prosperous days of 2005, with the Katrina effect, we didn't surpass $70 oil. And here we are in the steepest global recession since WWII, and oil prices are at $74. Inventories are at multi year highs.

Philip Verleger's view are right on, in my view. Not necessary that we get there in 2009, but I think that $17 or $20 is much more likely than $100.