Debate flares at Morningstar

By Bryan Borzykowski | June 12, 2008 | Last updated on June 12, 2008
4 min read

If there’s any topic that can spark a heated debate, it’s the rising price of oil. Where the cost of the expensive commodity will go was the main topic of discussion during a Morningstar Investment Conference panel on Wednesday, with one forecaster saying we’ll see a barrel of crude hit $140, while another speaker said prices will drop to $85.

“An awful lot of people are surprised at just how high oil prices have gone,” said Patricia Mohr, vice-president, industry and commodity research, at Scotia Economics. “I wouldn’t be surprised to see oil move higher in the second half of the year to the $140 mark.”

Mohr said the expected rise in prices is partly due to Russia’s dwindling oil supply. Production in the former Soviet Union dropped last year, and high export taxes on crude are making the country’s supplies less attractive to foreigners. “It looks as though the drilling activity has really stagnated,” she said. “All the major Russian oil producers are posting year-over-year declines.”

Other reasons for the climbing oil costs have to do with demand in emerging markets, a slower U.S. economy and the inability of non-OPEC countries to meet global demand.

Dennis Gartman, the Virginia-based publisher of the Gartman Letter, an investments-focused newsletter, disagreed with Mohr’s assessment. The vocal American told the audience that he is bothered by people who say that the crude oil supply is tight. “If that’s true, why is WTI and Brent Futures at contango? This last $40 in crude oil is absolutely absurd and will disappear very quickly.”

He said oil should fall to the $85 mark a year from now.

Mohr countered Gartman’s argument saying that “this idea that things have to fall back is not always the case.” She points out that a few years ago everyone was upset over $40 oil. That eventually moved up to $60, and then to $80. While she admits that “we’re in something a bit different,” people shouldn’t think everything will go back to the way it was. “It could move down again as we move into the next decade,” she said, “but the level will remain much higher than where we started this decade.”

Emerging markets will also keep oil prices high, said Mohr. In China, demand for SUVs remains strong, although the vehicle isn’t yet common there. She predicts the Chinese will eventually start buying bigger cars.

But Gartman points out that even though Chinese salaries are increasing, there’s no way they’ll be able to afford $4 a gallon for gas, so prices will have to stay low.

Eric Bushell, CIO at Signature Global Advisors, said while the Chinese market might be able to handle rising costs, other emerging markets won’t be so lucky. He said inflation is set to skyrocket to 13% or more. If that happens, he said, no one will be buying houses or cars, and growth will stall. “We bought a bit too much into this seductive emerging markets growth story,” he said.

Besides oil, the panel had a spirited debate around the Canadian dollar. Gartman proclaimed that he was getting “violently bullish” on the loonie again. “I’ve been toying with the notion of owning Canadian dollars against the euro and against the yuan,” he said.

That comment prompted John Embry, chief investment strategist at Sprott Asset Management, to point out that “in one breath, you just said the oil price is going to get crushed, and if the oil price gets crushed, the Canadian dollar is going with it.”

Gartman pointed out that Canada has other commodities — copper, corn, canola — that will keep the Canadian dollar high. “You’ve got all kinds of crap to sell,” he told Embry, “not just crude oil.”

“I can’t agree with you,” said Embry. “The shutting of the [GM] car plant? The dollar went down. I don’t like the American dollar, but we’re so interlocked with the U.S.”

The issues surrounding the credit crisis also came up in the panel’s discussion. Gartman said he thinks we’re “through the seventh and a half inning of a nine inning game,” adding that “we’ll get through this.”

He expects hundreds more banks to file for bankruptcy — only two have so far — but it won’t spell the end of the financial industry. “We think the world is coming to an end, but we’ve seen these things before,” he explains.

Embry “totally disagrees.” He said North America has “never been in a position like this” and that it’s impossible to predict what’s going to happen. “We could be in the second inning,” he said. “We haven’t necessarily seen the worst.”

Mohr explained that the U.S. slowdown will continue but that it will be a prolonged downturn, rather than a sharp decline. “We will remain very soft in the U.S. for some time,” she said. “Housing is going to be very slow to recover. Home builders in the U.S. are basically scared to death.”

Despite all the back and forth between panelists, everyone agreed that poorer economic conditions in the U.S. can only help Canadian banks. Bushell explains that Canadian financial intuitions are well capitalized and are much more profitable than their U.S. counterparts. “They’re in a position to kick over carcasses,” he said. “Canadian banks will exit this episode to become bigger.”

“Absolutely,” adds Gartman. “Canadian banks are going to be in the driver’s seat for the next decade. They’re going to come around and buy everything in the U.S.”

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Bryan Borzykowski