When It Oil Falls Down

With crude oil wiping all 2011 gains off the board and natty dropping below $ 4 last week, you have to wonder what the S&P downgrade will do to oil futures and energy in general. We have seen a commodity bull run of historical proportions over the last few years. We have seen oil jump to an unprecedented $170 and then fall below $30 and rise again. We have seen corn hit all time highs. We have seen cotton at Civil War peaks. We have seen silver spike to prices not even the most ardent bugs would have called. We have seen gold skyrocket. We have seen everything from copper to soybeans experiencing price spikes once thought impossible. Well...it all falls down, doesn't it?

Now we deal with the ramifications. Commodity prices eventually have to come back down to earth. Perhaps not all immediately or at the same time, but it is inevitable that a weakening global economy and a depression of demand effect bullish prices adversely.
Oil fell to ~$85/bbl on Friday and is currently @ ~$82.

The effects of the downgrade still have not been felt in full, but if you had to make a bet would you be willing to wager we could be back in the low double digits any time soon?

In what is shaping up to be our current environment, commodity prices will have to drop likely bringing along with them more instability in non-producer nations. As for us here, I am wondering what the smart play is for investors. Many are sticking to their guns in predicting $150-$200 oil barrels, while I am tempted to say that we could easily see $50 at the barrel and $2.50 at the pump soon enough.

Overall, I am having a hard time imagining energy prices up as the crisis wears on. We are beginning to enter that no man's land where there's no end in sight and the start is too far in the background to warrant going back to the drawing board.
What do you guys think about oil and energy going forward? Is the bubble bursting... or has it already popped?

 

What I find so incredibly amusing is the naysayers who complain about high energy prices, claiming it will be our downfall and is costing us so much...and now when it's getting cheaper, no one's celebrating. It's always going to be extremely volatile; personally I don't believe we're in an energy bubble because people will always need to buy gas. Over the long term, energy prices will gradually rise; it will just be extremely uneven.

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I better see this at the fucking pump. How I'm still paying nearly $4/gallon is beyond me. I waste so much money at the damn pump.

Interestingly enough the EIA projected oil at $105/brl for 2012 (about a month ago). I wonder if their next release will be lower. I would expect $95 or so.

twitter: @CorpFin_Guy
 
Best Response

Bingo. If oil hits $50/barrel, I'd be thrilled. That would be a huge buying opportunity.

The world is in better shape than it was 5 years ago with regards to supply- the picture doesn't look quite as scary for consumer nations in the long run, but it never hurts to have a lot of oil lined up. Especially since some of the more extreme global warming models have been discredited. This is not to deny AGW, just to stop folks from claiming that if we keep burning fossil fuels, Antarctica is going to melt in the next 100 years.

If I am ever going to be able to afford to fill up that private jet 30 years from now (OK, being a thrifty Dutch guy with some aviation skill, it will probably just be a used Cessna 152), I'm going to need a lot of dividends from oil stocks.

 

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