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Monday, December 15, 2008

Looks Like It's Time to Buy Oil

Looks Like It's Time to Buy Oil By Zhuge Liang

Crude oil is down over $100 per barrel from its highs of this past summer. Oil traded at around $150 per barrel and gas prices rose to over $4 a gallon. Oil currently trades at around $47 a barrel and gas prices are well under $2 dollars a gallon. The precipitous decline in the price of oil can be attributed to the decline in oil speculators and falling worldwide demand due to the slowing economy.

As oil prices continue to drop this may represent an attractive buying opportunity in energy related equities. Oil should bottom at around $40 a barrel. The fundamentals are in place however for oil to rise over the long term. The current cheap oil environment hurts the development of alternative energy projects. The oil market should rebound at the start of an economic recovery or any significant production cuts from OPEC. Demand for crude oil will return with economic stability and increasing the money supply should produce an inflationary environment that leads to a rise in commodity prices.

Lately television pundits and analysts have stated that oil may go as low as $25 per barrel. No one knows the exact bottom for the oil market. But if oil does hit $25 a barrel; oil should rebound off that level rather quickly. Many of the same people touting oil at $25 were saying that oil at $200 a barrel was just around the corner.

Speculation that oil prices are beginning to bottom helped push crude contracts higher as traders closed out short positions and rumors surfaced that both Russia and the Organization of Petroleum Exporting Countries [OPEC] are planning to cut production next week.

Traders who took short positions on crude contracts, or placed bets that prices would fall, are buying contracts to cover those bets now that oil has dropped more than 20% in the past two weeks. Their exit from the market has been expedited by the belief that prices are nearing a bottom.

Still, many analysts believe the market has “overshot” the downside to oil, and that further production cuts will be enough to create a floor for prices.

Oil is probably in the early stages of forming a base at the moment, and the price will likely edge up toward $60 or $70 by the middle of next year. We probably overshot on the downside the same way we overshot to the upside earlier this year.


1 comment:

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