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Gavin, welcome to Investor TV. Today we are going to talk about commodities and exploration - where do you think we are headed?
Gavin Wendt, Fat Prophets
We are overwhelmingly positive on the resources sector. We believe commodities prices will go higher simply because of tightness in the supply of commodities and ongoing strength in demand. That means prices really can only go one way.
Investor TV
So things are booming for resources - but has there been much work done in exploration?
Gavin Wendt Fat Prophets
One of the unfortunate consequences of the way the resources sector has panned out is the quantum of exploration spending certainly within Australia has dropped off quite remarkedly. Independent numbers have shown that exploration spending has dropped off steadily over the last five years and that is a worrying trend.
Investor TV
What effect will that have in say a decade from now?
Gavin Wendt Fat Prophets
The major consequence is a lack of new mines which will lead to exacerbating the current tightness we have in the resources sector. We need new supply coming on stream and if those mines aren't forthcoming it's going to put tremendous pressure on not only on commodity prices but on inflation over the longer term.
With the respect to oil we might be a little bit different from the rest of the market. Although the oil price has weakened off over the last couple of months, that's more to do with seasonal factors in our view. Also there's a fair amount of risk premium factored into the price for potential price disruption from the Gulf of Mexico hurrican season which turned out to be a fizzer and also Middle East issues, the Lebanese war, which didn't impact production at all.
We've got a very fundamentally positive view on oil basically because we believe the world is consuming more oil than it is physcially replacing and that's not just a short term view - we can't see that situation changing over the medium term, because of a lack of exploration spending that we discussed earlier.
Investor TV
So do you have a price target for oil?
Gavin Wendt
We've got a short term price target for oil of US$85 a barrel. We believe it can achieve that level within
12 months. Longer term we believe oil will exceed US$100 a barrel.
The major impact of rising oil prices is the inflationary impact on world economies. To a degree China with its cheap labour supply is keeping inflation at very low levels world wide, particularly from the aspect of production of electrical and white goods, clothing etc. Counteracting that we are looking at an outlook of higher oil prices and we believe that will feed into the world economy and will have a significant impact on inflation in years to come. That may well impact on economic growth to some degree but we think people are going to have to get used to the scenario of high oil prices. We don't see people changing their driving habits, certainly not in the US, people might be switching to smaller cars but overall it is very hard to wean people off crude oil consumption.
Gavin Wendt, Fat Prophets
We are overwhelmingly positive on the resources sector. We believe commodities prices will go higher simply because of tightness in the supply of commodities and ongoing strength in demand. That means prices really can only go one way.
Investor TV
So things are booming for resources - but has there been much work done in exploration?
Gavin Wendt Fat Prophets
One of the unfortunate consequences of the way the resources sector has panned out is the quantum of exploration spending certainly within Australia has dropped off quite remarkedly. Independent numbers have shown that exploration spending has dropped off steadily over the last five years and that is a worrying trend.
Investor TV
What effect will that have in say a decade from now?
Gavin Wendt Fat Prophets
The major consequence is a lack of new mines which will lead to exacerbating the current tightness we have in the resources sector. We need new supply coming on stream and if those mines aren't forthcoming it's going to put tremendous pressure on not only on commodity prices but on inflation over the longer term.
With the respect to oil we might be a little bit different from the rest of the market. Although the oil price has weakened off over the last couple of months, that's more to do with seasonal factors in our view. Also there's a fair amount of risk premium factored into the price for potential price disruption from the Gulf of Mexico hurrican season which turned out to be a fizzer and also Middle East issues, the Lebanese war, which didn't impact production at all.
We've got a very fundamentally positive view on oil basically because we believe the world is consuming more oil than it is physcially replacing and that's not just a short term view - we can't see that situation changing over the medium term, because of a lack of exploration spending that we discussed earlier.
Investor TV
So do you have a price target for oil?
Gavin Wendt
We've got a short term price target for oil of US$85 a barrel. We believe it can achieve that level within
12 months. Longer term we believe oil will exceed US$100 a barrel.
The major impact of rising oil prices is the inflationary impact on world economies. To a degree China with its cheap labour supply is keeping inflation at very low levels world wide, particularly from the aspect of production of electrical and white goods, clothing etc. Counteracting that we are looking at an outlook of higher oil prices and we believe that will feed into the world economy and will have a significant impact on inflation in years to come. That may well impact on economic growth to some degree but we think people are going to have to get used to the scenario of high oil prices. We don't see people changing their driving habits, certainly not in the US, people might be switching to smaller cars but overall it is very hard to wean people off crude oil consumption.
