BT: Investors looking for profits in oil can stop now (05 Sep 2008)

Investors looking for profits in oil can stop now

Attention shifting from oil to slowing economies: analysts

By OH BOON PING

(SINGAPORE) Investors looking to profit from the lucrative energy sector may want to pull out now, with global economic conditions having weakened sharply and some analysts recommending underweight exposure to cyclical sectors.

According to Didier Duret, chief investment officer of ABN Amro Private Clients Global: 'The long-term story of commodity scarcity is still in place, but only a return of positive GDP momentum will create the fundamental conditions that attract investors' interest.

'This won't happen before mid-2009, when the US should regain some colours. In the short term, policy actions in China to cope with slower growth may, if successful, revive interest. But the effect of these measures will not be observable before the middle of the fourth quarter.'

Last month, OCBC economists Selena Ling and Enrico Tanuwidjaja wrote in a report: 'Crude oil is officially in a bear market, down some 22 per cent from its July peak to around US$114 per barrel.'

They pointed out that market attention has shifted to the slowing economic climate, instead of oil supply.

Supporting this view, the benchmark Dow Jones-AIG Commodity Index shed 5.94 per cent last month, with significant losses in silver, natural gas and heating oil.

Yesterday, crude oil rose for the first time in five days as Hurricane Ike strengthened in the Atlantic and the US dollar declined, boosting the appeal of commodities as a hedge.

Mr Duret reckons that the world economy is a cyclical turning point where 'the divergent growth story between developed and emerging markets has lost weight' amid a worldwide slowdown.

The recent unwinding of large speculative positions, as well as monetary policy tightening in emerging markets, has aggravated a global slowdown in commodity prices, says Citi's Norman Villamin, who heads the research and strategy group of the bank's Asia-Pacific global wealth management division.

Additionally, 'supply responses, especially in agricultural commodities, have begun to narrow the supply-demand imbalances in place earlier in the year', he said. 'We believe the further unwinding of speculative positions remains an overhang in the near-term, while cyclical concerns are increasingly properly priced into the market.'

In the medium term, analysts think supply constraints have subsided as high oil prices have channelled demand for energy elsewhere, even though sustained strong demand in the long run should continue to drive oil prices up.

For example, Goldman Sachs expects 'declining trend oil-supply growth and supportive emerging markets oil-demand growth to continue to offset demand weakness in developed economies as it has done so far this year'.

The investment bank also maintains a year-end oil price forecast of US$149 a barrel. Others such as Mr Duret think that market volatility in the soft commodities will continue as supply becomes more elastic.

Looking ahead, OCBC recommends that investors look at fixed-income or principal-protected accounts in this turbulent market, says the bank's Mr Tanuwidjaja.



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