OIL – What is it good for?

Paraphasing Edwin Starr:

http://www.youtube.com/watch?v=Cv5BYEOQYLo

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I have this theory that the oil market is broken. I predicted that gasoline prices would spike this summer NO MATTER what the price of oil. In other words the price of oil has been decoupled. I think it is the result of speculators driving the price up last year past 3$$ a gallon. The Saudi’s always said that that was a “psychological barrier” for Americans. Maybe they were right and the speculators were stupid.

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http://www.youtube.com/watch?v=r-bA9FYB8HY&feature=related:}

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Is It Time to Buy Oil?

 

 

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Even Warren Buffett has been bamboozled by oil.He admitted it in his latest annual report to the shareholders of Berkshire Hathaway (NYSE: BRK-A) — the holding company he runs. In his own words: “I bought a large amount of ConocoPhillips (NYSE: COP) stock when oil and gas prices were near their peak. I in no way anticipated the dramatic fall in energy prices that occurred in the last half of the year.”Specifically, he made the bulk of his purchases during the six months ending Sept. 30, 2008 — you know, the same time in which oil prices peaked near $150 a barrel.

The price of oil is now around $50 a barrel, and ConocoPhillips’ stock price has tanked in lockstep with the oil freefall. Buffett clearly bought oil too early. But is it still too early for us to buy up oil stocks now?

Now may be the time

Those bullish on oil point to the inevitability of “peak oil,” arguing that the time will come when we hit the peak of global oil production. From that point on, we’ll be able to pump less and less oil out of the ground. In economic terms, we’ll face decreasing supply.

Meanwhile, bulls argue that demand will increase greatly, as China and other emerging markets fuel their economic growth with oil. On average, each person in the U.S. consumes about 25 barrels of oil a year; each person in China consumes just more than two. That’s a lot of possible future demand.

And all of us amateur economists know what happens when you restrict supply while simultaneously increasing demand: prices rise.

But then again …

Um, weren’t these the same arguments made when oil was at $147 a barrel? Yup. At that price, all these favorable supply and demand assumptions were baked in, and then some. The subsequent price fall highlights that we’ll only make great returns if we buy at low prices.

With oil prices at a third of their summer highs, oil plays are certainly tempting now. Getting in at steep discounts to the prices Buffett paid is a wonderful thing. However, when we look back in time, we see that current oil prices are four times the lows of the late 1990s.

In other words, looking at price movements by themselves just isn’t that helpful. We need to estimate oil’s intrinsic value.

How do we do that?
Beyond bubbles and busts, oil should sell at its marginal cost of production, plus some profit. Unfortunately, that’s not easy to calculate with much precision. Some oil sources are really easy to find and extract (traditional onshore) while others are especially onerous (especially oil sands and deepwater).

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AND YET From the same source:

Oil falls to near $48, following stocks down

 

 

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Oil prices fell Wednesday, weighed by weaker stock markets and waning optimism that the U.S. economy will soon recover from its severe recession.Benchmark crude for May delivery fell $1.09 to $48.06 a barrel by afternoon in Europe in electronic trading on the New York Mercantile Exchange. The contract fell $1.90 on Tuesday to settle at $49.15.Oil and stock markets have dropped this week, winding back March’s big rally, as investors eye what could be a grim first quarter U.S. corporate earnings season.

Oil traders often look to stocks as a measure of investor sentiment about the overall economy. The Dow Jones industrial average fell 2.3 percent Tuesday. Asian and European markets also dropped Wednesday.

Alcoa Inc., the world’s third-largest aluminum maker, reported a loss of $497 million for the first three months of the year as revenue dropped 44 percent. Alcoa was the first blue chip company to report first quarter earnings and is considered an indicator of upcoming results from other firms.

“The rally we saw in oil and equities was based on optimism that all the fiscal stimulus will be effective in sparking demand down the track,” said Toby Hassall, an analyst with Commodity Warrants Australia in Sydney. “But we haven’t seen much evidence of that yet.”

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http://www.youtube.com/watch?v=5DIp7ew_z8I&feature=related

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