Blog : Oil will be Range Bound

October 20th, 2008

First off, I'll tell you that this penny stock market has proved me wrong a couple hundred times over the last six months, so I'm a little gun shy to make any predictions. We've never been in a situation comparable to this, so there are few telling precedents to help guide us.

However, I think a few things will happen, as they always have in the past since the inception of the market.

1. people's fears and uncertainty will fade away

2. the markets will recover to their previous highs, and then beyond

3. oil and gold consumption will continue to increase over the long term

The only question is when. Maybe in the comings months, or maybe it takes years. But I'm not telling you anything you don't already know.

The thing about oil is that it's the second most common liquid on the earth, after water. There is plenty of it, and more than we could ever use in the next 50 years.

The real cost comes from the demand for the post-production oil (meaning oil which has been harvested and refined). As prices rise, countries and companies become more motivated to:

explore more
pump/extract more
bring marginal, previously unprofitable reserves online

Very recent advances also factor in to affecting prices and supply. For example, new technologies allow for quicker and more efficient pumping, as well as tapping previously unprofitable reserves. Many exploration and production companies are even going back to previously closed wells, forcefully flooding and injecting water down into them, which enables harvesting of some of the 30% of oil that used to get left in the ground with conventional production techniques.

Based on this situation, the higher prices go, the more oil production you will see worldwide. This will dampen demand via increasing supply.

The cheaper oil is, the more it will get used, resulting in greater demand, thus acting to drive prices higher.

Yes, that's supply and demand 101, but if that was the depth of my point I wouldn't have bothered writing this article. The point is that forces of supply and demand that are normalizing oil prices are acting in high gear right now. Instead of wild $7 intraday swings and $60 a barrel nose dives, look for oil prices to be range bound between $75 and $110 with most price movements to be in the one or two dollar range each day, and expect to see this for the foreseeable future barring any unforeseen event of major significance.

Thus, higher prices encourage lower prices, while lower prices encourage higher prices. The result for us in the coming year or more will be that oil will trade within tighter limits, and going forward those limits will be less extreme. You won't likely see $145 oil anytime soon, nor will you likely see $60. You also won't likely see major $7 swings in oil prices in a single day as we've witnessed recently.

I do feel that we are at or near a stock market bottom, which I alluded to in my previous blog, "Penny Stocks and the Meltdown."

If this bottom is finally coming to pass, money that has been sitting in commodities will start to move back into equities. This will result in a net positive effect for stocks, and net negative effect for oil and gold.

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Blog : Oil will be Range Bound