OIL

The political upheaval spreading across North Africa has sent the price of a barrel of oil above the 100-dollar mark. Besides political tensions and their unpredictable outcome, the harsh winter season and accelerated growth in the United States and China have spurred the rise in demand for petroleum products. China, for instance, broke its all- time record for oil imports with 9.6 million barrels a day in December, which is more than Saudi Arabia’s total output for the month (8.25 million barrels a day). This increase in emerging country imports is a structural phenomenon and the main factor behind the higher demand.

Nonetheless, the recent spike in oil prices strikes us as too abrupt to be entirely justified by fundamental economic factors.

Several factors relative to the current economic context or specific conditions seem to be acting in concert to sustain today’s high price for oil:

• The harshness of this winter season across North America and Europe has raised the overall demand for energy;
• The reluctance to revise OPEC quotas, as approved last December,has prevented raising output and hence has constrained supply;
• An all-time record in net long positions on the New York oil futures market was recorded in January.

These factors taken together naturally exert upward pressure on the price of oil, although to an extent that remains difficult to estimate. The purely speculative aspect has undoubtedly added at least 10 to 15 USD to the barrel above the supply-demand equilibrium price.

While we are projecting that oil prices will continue their upward climb over the next few years, the risks during the upcoming months tend to favor the downside:

• Oil inventories within OECD countries, though lower since the beginning of 2010, are still above their average over the past five years;
• Unused production capacities in OPEC remain high: Saudi Arabia could easily expand production, like it did in the summer of 2008, pushing prices back down;
• which in turn will dampen activity and reduce the country’s demand for commodities;
• Lastly, as the world recovers from this major downturn, the barrel at a price steadily above 100 USD would clearly induce inflationist effects, thus exerting a recessionary influence on the global economy. Such a price levelwould raise business production costs, squeeze profit margins and reduce household purchasing power.

The price of oil should range between 85 and 100 USD a barrel over the next 12 months given world growth projections in conjunction with unused production capacities that are now able to absorb a demand shock.

GOLD

At the beginning of January, gold entered a slight correction phase, returning to a price below the threshold of 1,320 USD / ounce, before rebounding to nearly 1,350 USD / ounce with the outbreak of political strife. A reduced interest in gold on the part of investors, as manifested by the very weak investment flows on ETFs combined with a considerable jump in selling positions on futures markets (at a 5-year high), has contributed to this price drop. Moreover, the decline in risk premiums on euro zone sovereign debt has also played a role. This decrease however has been moderated by the physical demand for gold stemming from Asia (primarily India and China).

Over the medium term, the demand for gold as an investment purchase will remain solid. The demand for gold as a financial asset will continue to benefit from: low interest rates, the search for a substitute to paper money, and inflationist fears. The geopolitical context has once again become a decisive factor in favor of gold, should the Egyptian crisis last longer or spread to oil producing nations on the Arabian Peninsula.

NWe feel that the price of gold could over the next few months stay at its current level, as downside and upside factors balance each other out. By the end of the year however, gold has the potential to rise as high as 1,500 USD / ounce.