It’s up – it’s down – it’s flat… Oil supply is building, wait, it’s decreasing. The weak dollar is effecting prices, no, wait – it’s the speculators, or maybe demand…
The foregoing jibber-jabber is a small sample of the back-and-forth opinions being presented recently over the relative spike in oil prices from the lows over the winter through the current period. It has been difficult for oil to pick a solid direction recently, though; it is decidedly up over 100% in the last six months.
The uncertainty in the price of oil and, therefore the tremendous differentiation of opinion by pseudo-economic experts alike is predicated on a series of significant discrepancies in the underlying fundamentals, or lack thereof.
Last summer we saw the price of oil reach an all-time high near $147 a barrel. This was attributed after the fact to speculators as opposed to a genuine increase in prices based on increase in demand. Now, the price per barrel is more than half that price but has increased drastically of recent, perhaps in a similar speculative fashion.
The problem at large is that the supportive fundamentals in the marketplace are not there. There has been a drastic reduction in capacity coupled with a complete retreat in spending by the consumer. Unemployed people tend not to drive too much…
Furthermore, though OPEC has reduced production in an effort to maintain price stability they have been unable to match the pace with which demand has paired off. We have seen a significant build in oil supplies and a relatively little increase and, in fact, a general decrease in demand which has attributed to the price reduction per barrel.
However, one cannot ignore the recent spike in prices. Of course, the bulls insist that higher oil prices are supportive of an overall recovery due to the return in demand. I don’t buy it. We cannot rely on Joe Consumer anymore to lift us out of the economic hole. This is evidenced by the recent run in oil to the mid $70’s followed by a retreat to $60.
As far as long term projections there is some agreement that prices will likely go up. Many are calling for a return to oil north of $100 by 2011/2012. If this is accurate, then I would suggest you buy some Exxon/Mobile (ticker: XOM), or United States Oil Fund (ticker: USO) as long term investments – meaning, buy them now and don’t watch them day to day but have it in your mind that in three years they’ll yield a significant return.
If you’re looking for more short term exposure (arbitrage) in the volatility of oil prices I would stick to the ETF’s; namely UCO (long oil) and SCO (short oil). However, be weary of the news and learn to read between the lines. If you choose to play short term then keep watchful eyes on inventories including crude, distillates, and gasoline. Do your homework and know when the inventory data gets reported and be prepared to be nimble and execute trade orders promptly.
Adhering to the later strategy helped me add a 20% return in one month using the same ETF’s I stated above.
Happy Investing.
Sound Off: Do you believe that oil prices are going up in the short term? Long term? Do you believe that it’s mostly speculation, or genuine influence from supply/demand?
Tags: exxon mobile, opec, short term arbitrage, united states oil fun, us oil supply, uso, xom