Oil in the Long-Run

Crude prices have been on a roller coaster ride in the past year. Although oil is up 54% from its low of $33.87 on February 12, it is certainly well below its all time high of $147.27 since the summer.

However, the current financial crisis and the corresponding economic downturn may have caused the market to undervalue oil - similar to the run up in 2008 - despite the fact that oil is already up 17% this year.

In consideration of dismal demand, here are a few convincing arguments why oil is poised for another bull run in the coming years:

1. Falling oil supply: recent data from the Cambridge Energy Research Associates confirms prevalent industry and market opinions that a considerable proportion of supply growth is at risk, representing a fundamental catalyst for an increase in crude prices in the future. The report claims that nearly 7.6 million barrels of oil a day, or 8.04% of current total world oil production per day, is threatened due to low or canceled investments in oil and gas production.

2. Anticipation of inflation: money flooding into the system due to federal stimulus programs will eventually lead to a flight to commodities in fear of inflation following economic recovery.

3. Persistent and unabated demand from China and India, possibly with no feasible alternative for the next 3 to 5 years.