The Stock Nerd

As you can see from my past post, I watch the NYMEX Crude Futures on a daily basis, even when the market is closed (yes i’m obsessed). Just to share, my favorite website to check on energy prices is right here: http://bloomberg.com/energy/. I definately like the fact that it’s laid out nicely all in one page. You should consider bookmarking it if you love checking the price of a barrel on a daily basis like me.

In my featured article, All Eyes on Oil, I pointed out what I believed were the reasons for the increasing barrel price. Most importantly, I pointed that the current market prices at the time ($133.26 on May 27th, 2008) were very unjustified due to speculation (Point 6!). Furthermore, I stated we would certainly see a correction in oil prices down to $110/barrel, which I believe would still be a good estimate if it wasn’t for the deteriorating economic conditions that have recently unraveled (more on this in a later article!). Well, here we are and oil prices have most certainly adjusted, but far more than they should have (who said speculation can’t go the other way?).

Here’s a chart to show you how quickly oil barrel prices have fallen in a short period of time:

As you can see, oil prices have plummeted in an extremely short period of time, and my personal opinion is that the low price of $77.70 is not justified. You may have noticed that i’m all for lowered gas prices and that I HATE when the large firms predict oil barrel prices to be insanely high in the near future. Well, I most certainly still have the same belief, but I’ve got a few of my own thoughts to share about the extremely low prices.

What do I think?

(I will be following the same format as the All Eyes on Oil post)
1. The rising dollar has most certainly assisted in lowering the prices of crude since it was generally being used as a hedge against the lowered value of the dollar. You will notice that there is some sort of correlation between the strength of the dollar and oil. The stronger the dollar, the cheaper oil gets (and vice versa - at least in recent history - this is obviously subject to change once other factors come into play such as peak oil whenever that comes around).
2. Developing nations, such as India and China, are actually having slowed demand due to the global slowdown. This is a very shocking slowdown in the US and has spread globally. Once investors realized that it was going to affect EVERYONE, oil prices began to drop even lower and lower.
3. I think we can agree that the demand of oil is still clearly inelastic since our world depends on it to function efficiently this day in age. BUT, due to the global slowdown which has lowered overall demand of oil worldwide, we have noticed a huge decrease in oil prices. You better believe that once we’re out of this slowdown, oil prices WILL bounce back.
4. Conflicts are still happening just as often as before. In fact, Nigera is STILL having its oil pipelines attacked. Fortunately, investors aren’t as swayed by it as they were from April 08-July 08.
5. Although long-term supply concerns still exist, the world is focused on what seems like STRICTLY demand now. Just like before, we’re still avoiding the full spectrum of fundamentals. For the oil prices to be correct, both supply and demand need to be taken into consideration. All supply concerns seem like they’re being avoided at this point in time (oil prices are continuing to fall even though OPEC has cut production of oil and will obviously continue to do so), similar to how it seemed like all demand concerns were being avoided by investors in June 2008. When we start bouncing back and the world takes a good look at the fundamentals again, we won’t be able to sustain the current prices.
6. In the previous article, I stated that speculation was heavily inflating the price of a barrel of oil. Now, I believe that speculation is heavily deflating the price of oil. The problem with speculation is that eventually, focus will shift to supply and we’ll likely be on an upward movement once again. I won’t be surprised if we hit even $60/barrel before we see prices bottom out.
7. With the lowered gas prices, alternative energy solutions have slowed. It sucks. I think if we want to see reduced oil barrel prices for an extended period of time, we need to be on a continuous search for solutions no matter how low the price of oil.

Based on the factors above, I believe that we are certainly seeing oil prices that are far too deflated. I still believe we should be around $110/barrel if all fundamentals are considered. The current global slowdown will most likely hamper gains in oil prices until it is over. The problem is that once the global slowdown ends, oil will be back on its upwards trend and speculation will turn around! All we can do for now is hope that the search for alternative energy and more efficient cars continue so it doesn’t hit us as bad in the future. It’s our responsibility as humans on this planet to help ensure we aren’t going to be paying insane gas prices in the future due to our lack of searching for alternatives while gas prices were lowered.

By the way, if Ford and GM are still around in 2010, they should be releasing cars that are around 60 mpg from my understanding. We should see some models from Honda, Toyota, and the other major car manufacturers soon to compete with that also.
Until next time!
- The Stock Nerd

P.S. Feel free to share your thoughts in the comments section.

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