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Oil is Cheap (Again)Jan 31 '07 Write an essay on this topic.
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The Bottom Line Oil looks cheap again. I like buying cheap things.
Oil is Cheap Oil traded at 18 bucks in 1998 as the Asian economic crisis hit the front pages. There was a serious oil glut on the market, and while the US market was red hot, the rest was not. Oil was cheap. In 2000 oil traded at about 35 US Dollars per barrel. The Dollar was trading at better than 1:1 against the Euro. The US Dollar has lost 30% against the Euro and the Pound since that prosperous year, now Oil is trading at a tad over $50. Priced in the not-as-quickly depreciating Euro, this is tad over year 2000 prices. Oil is Volatile Oil has an extraordinarily high marginal use value; yet, in much of the world we have disregarded this reality in favor of using it for very low margin uses, like driving cars. Overproduction of oil is essential to keep prices low, if overproduction isnt sustained, Oil cannot be kept cheap enough for politicians in consuming nations to get elected. In order to do this excess capacity must be in the system, even thin amounts of overcapacity insure low oil prices. However, this excess capacity cannot, and has not always been maintained. When the Fed pushed the monetary gas peddle, it caused the energy infrastructure to experience what it had not in a long time - massive pressure on marginal capacity. Suddenly, the Niger Delta, Venezuela tar sands, Canadian Bitumen and Saudi Terrorists became oh so important; if anything tripped we would all fall down. Prudhoe Bay and a Well Timed 'Recession' Then, the 'trip' happened. Purdoe Bay shut down due to a previously undisclosed oil leak. As the source of oil went away, the system did not trip. In fact, oil prices declined. Then it kept on declining. As refining capacity faced less pressure the price of gasoline tumbled. Inventory of Oil went up. To me, what was happening had the hall-marks of recession; less pressure on capacity, building inventory, and a massively deflating housing bubble. Oil is Cheap Again As this was happening, the public attitude among many was "Oh, it's just Bush trying to get re-elected, or it was Goldman Sachs moving their energy index." The first was improbable, although for some reason since Katrina refiners have been maximizing gasoline production at the expense of other oil products, the second is improbable, as energy traders arent stupid and they will do as they please and will not so easily swayed. Anyhow, oil is again cheap, for whatever reason. Oil Price Likely Has Floor China is building a new Strategic Petroleum Reserve. Bush 43 just announced the doubling of reserves, mainly to bring us up to 100 days of oil use, from the current ~50 days. Europe is raising yellow and red flags on oil and gas security. There are (still) plenty of Dollars floating around, but Oil is looking scarcer. This probably means that oil has about a $50 price floor to it. It's Your Money It's your money. Not mine. Manage it like you see fit. Get expert advice. Yadda Yadda Yadda. Leave a comment or question if you wish.  |
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