August 5, 2005 Oil, Gas and Copper

The equity markets in North America were quite mixed this week. The TSX started off strong and held the gains for the week and is now up 1304 points or 14.1% for the year to date. The NASDAQ is at the highest level of the year and is now 2.5 points above the December 31st closing level. The Dow Industrial Index is still 225 points or 2.1% below the December 31st level.

The Canadian market has been one of the best performing markets in the world due in large part to the increase in crude oil and other petroleum products. The oil & gas sector has been the leader all year and looks like it will continue the current strength for a while yet. Crude oil this week moved back over $62.00 and looked like it would move to a new high, it did not make it and closed the week at $61.85.

The recent increase in crude oil has pushed up the price of gasoline as well with gasoline now trading at $1.8250 gallon on the New York Mercantile Exchange (NYMEX).

The price at the pump has been over $2.00 a gallon for months now with the average price in the US currently at $2.29 a gallon it does not look like it will decline any time soon. The average price in Canada is currently 95.8 cents/liter or $2.625 US per US gallon and Canada is the largest supplier of crude oil to the US (go figure).

The price of natural gas has been moving higher as demand for electricity increases due to extremely hot weather across much of the US. Natural gas is used by an increasing number of utilities for the production of electricity. The increase in demand from air conditioning use has pushed many utilities to the maximum output and has drawn down the supply of natural gas across the US. Natural gas closed this week near all time highs of $8.57/MMbtu.

The increase in global demand for petroleum and natural gas has been very positive for the Canadian producers such as PetroCanada (PCA), Shell Canada (SHC), Suncor (SU), EnCana (ECA), Canadian Natural Resources (CNQ) and most of the Canadian Royalty Trusts as well. The leadership in this sector is well established and appears to have the potential to remain in place for a long time yet.

The base metal prices have been moving up again this week with copper up to new highs at US$3780.00 per tonne on the London Metal Exchange, zinc is at new high for the year as well at US$1272.00 per tonne. The price of nickel has fallen back to $6.52 per pound down from the highs achieved earlier this year but still nearly double the price of two years ago.

The inventory of these metals has been falling all year and is now at levels that could prove difficult if there is even a slight up tick in demand. The global demand has basically stabilized over the past few months this is in part due to increase in price which has forced some users to delay or abandon projects that can not be completed due to the increased costs.

The base metal producers such as Teck Cominco (TEK.SV.B) , Inco (N) LionOre(LIM),Aur Resources (AUR) and Alcan (AL) are all well positioned to take advantage of the long term increase in global demand for base metals. The changes taking place in Asia have the potential to continue to impact global markets for years possibly decades into the future. If you believe as I do that the potential for growth in China and India has only just started then the commodity producers should be core holdings in your portfolio for the long term.

I want to comment on the recent news out from CIBC regarding their settlement of a class action law suit arising from their dealings in the Enron collapse. I find it unbelievable that shareholders of a Canadian Bank can be led down the garden path by the management team, which had to know the size of the settlement that was being negotiated, ($2.8 billion only 10 times more than estimated in the most current financial statement as $300 million) only to get smoked for an 11% price decline in two days. Then to add insult to injury the management that got into trouble and negotiated the settlement retires and gets a bonus for a job well done?

In most situations incompetent employees would have been fired for cause and be out on the street with out any special compensation package. The compensation committee of the board of directors should all be asked to resign as they allowed the structure to reward manipulation and have failed at their job of representing the shareholders interests. As happens in so many bureaucracies, the management at CIBC appears to have forgotten they work for the shareholders. The board of directors in so many of these situations is far too close to management to make objective decisions.

I do not understand the compensation of bank executives anyway its not like they are bringing any radical new products to market, the Canadian bankers have one of the least dynamic markets to operate in. There is very little real competition, the Federal Government guarantees a large percentage of the lending through the CMHC mortgage insurance program. The management and the board at the CIBC do not appear to me to be earning their keep

Shareholders have got to become more vocal when these situations come to light and start demanding that those involved be dealt with and not rewarded.