UBS is projecting that crude oil will have a yearly average of $156 a barrel by the year 2012, with the price rising steadily over the next four years, even though they see oil averaging $115 a barrel this year, about $10 less than the recent highs. This is a reversal from earlier coverage which predicted a pullback in oil prices as demand fell in the face of a potential U.S. recession. UBS has also stressed that it believes the increase in prices are mainly due to demand growth (not met by equal supply growth), rather than speculation.

Who does UBS see as benefiting from this increase in oil prices over the next four years? As to the major oil companies, UBS believes Chevron (CVX) will benefit, in addition to Occidental Petroleum (OXY), Apache (APA), ConocoPhillips (COP), and Exxon Mobil (XOM), all of which have buy recommendations. In addition to the major oil companies, UBS has also initiated coverage of oil service, drilling, and equipment firms. Current buy recommendations include Transocean (RIG), Diamond Offshore Drilling (DO), Noble (NE), Ensco International (ESV), Atwood Oceanics (ATW), and Rowan (RDC).

Of the group, the oil services and equipment analyst at UBS prefers Transocean, a recommendation that is due in part to the recent news of Petrobras locking up 80% of the deep water rigs, while also attempting to extend contracts with Transocean for over three more years (see earlier post). Current daily rates are topping over $600,000 a day for leasing deep water rigs, almost three times the average rate of $219,700 just a little over 6 months ago. A number of analysts are also picking up on this story.

Analysts at RBC Capital Markets are suggesting that investors should take profits in gold as the traditional summer slowdown approaches - with the slowdown this year coming in concert with the potential for the Fed to quit lowering rates, thereby easing inflationary pressures. RBC then suggests buying back gold (hopefully at lower levels) in July, waiting for the rebound in gold prices that should occur in September or October.

The RBC analysts uses some data to support his/her case. Apparently the one year average return for gold equities following the beginning of an interest rate cut cycle is 17%. The current cycle began over 6 months ago, with gold and gold equities returning over 20%. The average cycle last about 8 months. Once the rate cuts begin to take effect (usually delayed 6 months), gold will generally under-perform the broader market.

Certainly worth considering, and interesting, but more research is probably in order. Keep in mind as well that gold plays often end in tears, as reversals are at times steep, swift, and unexpected.

RBC Recommended Tickers: KGC, HMY, JAG, and WGW
Other Gold Tickers: GLD, GG, NEM, ABX, AEM, KGC

At the same time gold prices fall below $900 (off 10% in a few weeks), Newmont Mining is reporting that it plans to spend nearly $250 million on exploration this year - and the increase is not just because gold is commanding a high price. Apparently there has been a shrinking number of gold finds above five million ounces, a key number to make a mine worth the trouble, or at least produce better margins. About 4 percent of reserves meet this benchmark. Apparently Newmont is depleting its reserves at 10 ounces a minute, but needs a replacement of 14 ounces a minute (I assume to keep up with supply and maintain reserve capacity). Currently, Newmont has about 86 million ounces of gold in reserve. In comparison, Barrick Gold Corp held about 124 million ounces in reserve, as of last year. Like other industries, commodity prices (i.e., energy), are increasing the cost of production.

Tickers: NEM, ABX