The current bull market is going to be much more pronounced due to the precarious situation of the US dollar and the 'peak oil' crisis.

With the correction in the price of crude from $147/barrel to about $110 in the last few weeks and with a similar decline in the price of gold from $1000 to $800/ounce, a lot of analysts have proclaimed a peak of the commodities market (ie. the oil bubble has 'burst'). But even a casual look at the chart of crude over the last eight years would confirm that we have had two similar corrections in the recent past - in 2004 when crude dropped 30 per cent and again in 2006 when crude dropped nearly 40 per cent and as I have explained (refer http://kinghubbert. blogspot.com), the fundamental factors of demand and supply that has driven crude prices for the last eight years are still very much in place and this will cause the prices to go much higher in the years ahead.

As we have been writing about how fundamentals justify much higher oil prices in the decade ahead, we find most other analysts basing their future price predictions by tail-gating spot prices. Given below is EIA's price projections and it is amusing to see how incorrect their predictions have been. Given our outlook for crude, their future projections are going to look even more so.

Two factors that drive commodity prices...

At a very fundamental level, there are two factors driving commodity prices ie. currency debasement through inflation that creates the demand by the increased quantity of money chasing an asset class and supply reductions due to prolonged periods of under-investments caused by low prices. In fact, these are the basic reasons that have driven every commodity bull market for the last 200 years. The shortest of these bull markets have been for 15 years and the longest one for 30 years. If anything, the current bull market is going to be much more pronounced due to the precarious situation of the US dollar and the 'peak oil' crisis.

Yet every time oil goes up, there will be some analysts who claima bubble. We would like to say that there indeed is a bubble, but it is not in oil or commodities, but in 'paper currencies.' In the final stages of the commodities bull market, one would witness the irrational exuberance in commodities that we witnessed in the technology stocks during the dot-com days. Listed below are ten future signs that would indicate that the current early stage has indeed reached bubble proportions. The first five pertain to commodities in general and the next five relate to oil.

• Finance professor writes a book 'Commodities for the long run': The number of books on commodities investing is probably less than ten as compared to the thousands for equities. Some finance professor is soon going to realise the market opportunity and write a book with the rationale that commodities will always go up because humans always have to consume commodities.
  
  
• B-Schools introduce a course on Commodities Investing: Though B-Schools have plenty of courses on equities and bonds, there is no single B-School that offers a course on commodities. As an asset class, commodities have never got the respect of their counterparts and this too shall end over the next decade. B-Schools would be vying with each other to offer commodities and commodity derivative courses.
  
  
• Stephen Roach buys commodities: Roach used to spell commodities with a single 'm' (ie. commodities) till a few years back. Of course, his utter lack of understanding of the commodities cycle did not prevent him from calling the commodities top which he has done twice in the last four years. By the time Roach understands the underlying drivers, it might well be another decade and that would probably be the time to exit out of commodities.
  
  
• Formation of 'Bernanke Top’: The two decade bear market in gold from 1982 to 2001 during which prices fell from $850 to $250/ounce saw even conservative Central bankers lose their faith in the market currency of gold. The then British Chancellor of the Exchequer, Gordon Brown, sold half of Britain's gold and even managed the dubious distinction of selling at the lowest price. That low point is now infamously referred to  in gold circles as the 'Brown Bottom.' By the time the current bull market ends, Bernanke would realise the futility of running the presses and would end up buying gold. That would signal the 'Bernanke Top.'
  
  
• Greenspan De-knighted: There have been many undeserving rewards in finance and economics (Nobel prize to CAPM, for instance), but none more so than the Knighting of Greenspan. When the current credit bubble unwinds over the next decade and perhaps brings structured finance to its knees, everybody would realise that the blame lies with Greenspan who laid the foundation for these bubbles. Princeton professor and former fed vice chairman Alan Blinder who had rated Greenspan as the greatest Central Banker in 2005, has now (after the housing bubble collapse) downgraded his rating marginally to a 'summa cum laude.' When Blinder has his blind spots unshackled by the unwinding credit bubble, he would probably give Greenspan a 'D.'
  
  
• EIA future price predictions are greater than the spot prices: As shown in the table, EIA has been increasing their price projections by following spot prices. Sooner or later, they are going to realise the folly of their increased supply projections and consequently put their price forecasts ahead of spot prices.
  
  
• IIT-JEE toppers choose Petroleum Engineering: By the time the bull run in commodities ends, we would find JEE toppers enrolling for petroleum engineering instead of computer science. The current MBA and software teaching institutions would re-brand themselves and offer courses on geology and geophysics.  
  
  
• CNBC anchors dress up like Oil-Sheiks: Though CNBC has started covering commodities, it occurs almost as an after-thought. A decade from now we would find anchors dressing up like oil sheiks and broadcasters from the stock exchanges would do so from the 'Pork Belly' pits.
  
  
• Tom Friedman stops commenting on oil prices: A few months back Friedman remarked how demand destruction would drive prices lower when he remarked: "…the faster we get to $100 a barrel, the quicker we're going to get back to $20. Because when we go to $100/barrel, then you're going to see all these people change their behavior and their oil-buying habits and their car-buying habits in a fundamental way...” When a person offers an insight into all situations such as geopolitics, economics, oil, global warming, management thinking (and I guess a few other issues have been missed), then it indeed is amusing to see the rest of the world taking these ramblings seriously.
  
• Planning Commission understands '’peak oil': When oil prices hit $70 for the first time in 2006, Kirit Parikh, Member- Planning Commission and Chairman- Energy Coordination Committee, remarked: "oil security, in my opinion, is a grossly exaggerated fear. We are concerned about the high price of $70 per barrel. On the other hand, there is a huge amount of potential oil substitutes available in the world." I had earlier explained in our article ("Of Tar Sands and Sand Castles," Business Line dated 16 August, 2006) as to why the oil substitutes that Parikh is referring to would remain a pipe dream. The energy economics of these substitutes are terrible and only somebody who is ignorant of the concept of 'Net Energy Returns' would even make such a comparison. As if to validate Peter's Principle of Incompetence, Parikh authored our 'Integrated Energy Policy.'  The only integrative aspect about the report is the ignorance of the Planning Commission members on fundamental energy issues.