Get on the other side of the bomb

If there’s one thing I’m sure of, it’s that casino owners have no soft spot for gambling addicts.

Likewise, auto body shops don’t want you to drive safely and Norton and McAfee don’t give a shit who’s hacking your computer (and probably expect you to continue).

You shouldn’t feel bad either. In our free market economy, no one is stopping you from profiting from oil the same way the big guys do.

Currently, the price of a barrel is right at $100. That’s a 32% discount from the high just two months ago. It’s true that I didn’t even think that it would drop to this level so soon. And I’m ready to start picking up some of that for a myriad of reasons.

A couple of good questions about oil speculation

If the price of oil was pointing to a “bubble”, how do we know that this bubble has completely burst? Couldn’t you drop a little more? Safe. However, there is an important difference between this bubble and one like the technological situation that occurred in the late 1990s:

You don’t need Yahoo! to run your car.

If a tech company goes bankrupt, there are two dozen clones researching the products or services you’re looking for. If we don’t have oil and therefore gasoline, we can’t just fill our gas tanks with Gatorade.

A bit of technical analysis backed by some fundamental analysis…

That’s right, I said fundamental analysis. But first things first.

Technically, one could see the $100 mark as an important support level given the late 2007 highs, or one could see the $90 level as important support given the double bottom formed in early 2008. Looking at the chart, one could make a case for major levels at each $10 mark on the way down to $60.

Either way, crude oil has fallen off a cliff in recent months and there is going to be a rebound. That is not a conjecture, nor a prediction, it is an absolute fact. Getting in on the long side anywhere under $100, or better yet $90, could pay off big.

Even more intriguing than the technical aspect is the fundamental aspect.

We depend on this resource (delete that, we are slaves to this resource) and we will not be weaning any time soon. Of course, “green” actions are being carried out in an effort to become less dependent, but barely enough to keep pace with the world’s population growth and the explosive industrialization of former second world countries (i.e., China). , Russia and India). Unless someone finds a new way to power the 750 million passenger cars in the world today, we need oil.

Let’s not forget one of the basic issues that fuels (no pun intended) the price of oil.

Production.

By production I mean the process of getting a barrel of oil to see the light of day. In other words, find the oil, build the platform or other mechanism(s), and extract the oil from the ground. Production costs for offshore drilling in the United States are currently around $70 per barrel. Of course, the Middle East does it for $10-$15 a barrel, dragging the world average down to just over $30 a barrel.

Realistically, if oil were ever to approach the US offshore production cost of $70, it would no longer be economically viable to continue production. If the US were to stop this production, supply would decrease, and with less supply, the cost of oil would still rise.

Furthermore, it is doubtful that anyone producing this product is looking to give the world a discount at their expense. The price will always be as high as the market is willing to bear.

Why not buy oil companies instead?

Good question. Why not buy a company whose profits depend directly on oil prices? Wouldn’t it inherently be taking a position on oil? Wouldn’t that be better, since the company (usually) at least pays dividends?

I will be frank: with this investment idea, I am thinking of oil. I am not thinking about the financial health of companies. I’m not thinking about earnings, cash flow, or dividends. Stocks may be dragged down by the broader market, but oil is its own animal. It doesn’t matter if some financial giant made a profit or not: stocks listen to oil, not the other way around.

With that being said, I am looking to start building a position in oil anywhere below $100.

“I’d rather get a better price.”

I also. I prefer to buy it at $3.50 a barrel. I can not. And if you can’t be with the price you love, love the person you’re with. During the most recent run for oil earlier this year ($90 to $147.35), in cents, there were exactly 5,736 different prices. There was a perfect buy and sell between them. If you picked them, send me an email and we’ll skip all this stuff and go to Vegas.

I’d rather take an opportunity, make money, and lose a few dollars of profit than lose the opportunity entirely because I’ve waited for the perfect price.

There’s too much going for you on the long side

At the heart of the matter is the obvious truth that there is a finite amount of oil, and we are consuming it. As each barrel empties, what remains becomes more valuable.

Better yet, oil is sensitive to instability in the world at large. Instability breeds concern. Worry drives down stock prices, but can overwhelm commodity prices.

What you need to ask yourself is this: “Do I think that, at some point in the reasonably near future, the price of oil could rise above $100 a barrel?” If his answer is yes, then here we are entering a good place to get involved in ownership.

My answer, my guess and my argument is “yes”.

John K Whitehall

Analyst, Oxbury Research

Note: The author and the editor do not occupy positions in the mentioned values.