Even though Oil has been over $100 for a while I chalk that up mostly to saber-rattling with Iran. I still stand by my old (May 2009) prediction that Oil "should" be between $70 and $90 a barrel (ceteris paribus).
So I am issuing my newest (UNLICENSED & UNPROFESSIONAL) advice to SHORT OIL NOW.
WHY NOW?
I) Oil is at $106.87 (at Friday's close 03/23/12) which is really high.
NOTE: I am no "gold bug" and thus I don't believe there should be a magical relationship between gold and oil in relation to the dollar. Sure those are factors to consider, especially because of the fact that so many people believe in such a magical correlation makes it a self-fulfilling prophecy.
But fundamentally Oil, like anything else, "should" be a function of supply and demand. With a finite resource and expanding demand, particularly from China & India etc., prices should trend upwards. But that trend is tempered by two reasons:
REASON#1 - Tar sands/oil sands, while terrible for the environment, are ridiculously abundant in Canada and worth extracting (only from an economic view) so long as Oil costs at least $70 a barrel. Hence my range for oil prices to be around $70 to $90 because any higher and that necessarily opens up a massive new supply (perhaps bigger than Saudi Arabia's oil reserves) which should bring prices down. If prices are close to $70 then those Tar Sands/Oil sands lay dormant because they wouldn't be profitable to extract.
REASON#2 - My "Solar Ceiling" theory. - http://corpania.blogspot.com/2008/07/solar-ceiling-why-oil-prices-must-drop.html
II) Oil Production is UP (especially in the US and also consider that Obama is already signaling that he'll ultimately approve the new and horrible pipeline from Canada) - http://www.chron.com/business/article/U-S-oil-gusher-blows-out-projections-3341919.php
III) Oil Demand is DOWN in the US (and also to a degree internationally, mainly due to the global recession) - http://thinkprogress.org/economy/2012/02/15/425926/gas-prices-rising-demand-1997/
IV) Speculators (factoring in a conflict with Iran) have already pushed up prices by an estimated 30% (and they may/should be satisfied taking profit now)
- http://www.businessweek.com/articles/2012-03-07/have-oil-speculators-already-priced-in-war-with-iran
V) The saber-rattling with Iran "should" subside...
GOOD NEWS ON MARCH 23rd...
(Reuters) - "The United States, European allies and even Israel generally agree on three things about Iran's nuclear program: Tehran does not have a bomb, has not decided to build one, and is probably years away from having a deliverable nuclear warhead."
- http://www.reuters.com/article/2012/03/23/us-iran-usa-nuclear-idUSBRE82M0G020120323
(Reuters) - "The United States, European allies and even Israel generally agree on three things about Iran's nuclear program: Tehran does not have a bomb, has not decided to build one, and is probably years away from having a deliverable nuclear warhead."
- http://www.reuters.com/article/2012/03/23/us-iran-usa-nuclear-idUSBRE82M0G020120323
NOTE: Now that it's apparent that Romney will be the GOP's nominee the likelihood of a U.S. war with Iran drops (albeit not as much as when everyone finally realizes that Obama will be re-elected).
BUT AS A HEDGE I WOULD ALSO ADVISE BUYING OIL STOCKS (especially BP)!
But you may ask: Wait a minute? Isn't that counter-intuitive?
I reply: It's a hedge (to reduce risk) but also I'm considering basic fundamentals.
For Example: BP is trading at a ridiculously low P/E ratio of 5.65 (when 10 to 15 would be more reasonable by historic standards) - Add to that the fact that no one seems to be clamoring for the heads of executives over there anymore. I also suspect their actual payout on damages to the Gulf will also be substantially less than most feared/projected (IMHO).
• Royal Dutch Shell is also pretty cheap (P/E ratio of 7.10) and so is Chevron (P/E ratio of 7.92).
Whereas Exxon has a P/E ratio of about what it should be = 10.16
NOTE: Keep in mind that oil prices have gone up considerably in the past quarter and new production is ramping up big. Both of those factors bode well for Big Oil revenue/profits.
BUT AS A HEDGE I WOULD ALSO ADVISE BUYING OIL STOCKS (especially BP)!
But you may ask: Wait a minute? Isn't that counter-intuitive?
I reply: It's a hedge (to reduce risk) but also I'm considering basic fundamentals.
For Example: BP is trading at a ridiculously low P/E ratio of 5.65 (when 10 to 15 would be more reasonable by historic standards) - Add to that the fact that no one seems to be clamoring for the heads of executives over there anymore. I also suspect their actual payout on damages to the Gulf will also be substantially less than most feared/projected (IMHO).
• Royal Dutch Shell is also pretty cheap (P/E ratio of 7.10) and so is Chevron (P/E ratio of 7.92).
Whereas Exxon has a P/E ratio of about what it should be = 10.16
NOTE: Keep in mind that oil prices have gone up considerably in the past quarter and new production is ramping up big. Both of those factors bode well for Big Oil revenue/profits.
FINAL RECOMMENDATIONS:
• Short Oil at $106.87 and then take profits if it drops to $101 and cut your losses if it spikes to $112.
• Buy BP stock at $45.59 and then take profits if it climbs to $51 and cut your losses if it drops to $41.
• Short Oil at $106.87 and then take profits if it drops to $101 and cut your losses if it spikes to $112.
• Buy BP stock at $45.59 and then take profits if it climbs to $51 and cut your losses if it drops to $41.
Let's see if my prescient streak continues. We'll see.
LINKS:
- http://thinkprogress.org/progress-report/five-facts-about-gas-prices/?mobile=nc
- http://www.reuters.com/article/2012/03/23/us-iran-usa-nuclear-idUSBRE82M0G020120323
- http://www.reuters.com/article/2012/03/23/us-iran-usa-nuclear-idUSBRE82M0G020120323
- http://www.chron.com/business/article/U-S-oil-gusher-blows-out-projections-3341919.php
- http://www.businessweek.com/articles/2012-03-07/have-oil-speculators-already-priced-in-war-with-iran
- http://corpania.blogspot.com/2008/07/solar-ceiling-why-oil-prices-must-drop.html
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