Time to Get Back Into Oil?

With the current price roughly 25% off its high, it is time to put oil back on the radar screen. Watch what Boone Pickens has to say.

I sold my (USO) position in May for $106.85, a 140% gain in 16 months (purchased for $44 in Jan. 2007). It now sits at $89, 16% below the sale price.

Buy now? No.

The global economy by almost every measure is slowing. Will it be a "global recession"? No. The pace of expansion will just slow. That will relieve some demand stress on the whole equation. The US economy, the main consumer of oil, looks as though it will muddle through in 2009.

That said, the supply / demand equation for oil--tilted to the demand side for the last year--ought to begin to stabilize. As it does, interest in the commodity will wane as easy profits will diminish. As it does, the price of oil (barring any significant geopolitical event) will slide with it.

How far? Under $100, or another 7% to 10% lower. Long term, the demand for oil will rise significantly. Any temporary demand reduction from China or India will be just that, temporary. The US will awaken from its current snooze and demand at home will grow along with it.

What could offset this? A cellulose ethanol breakthrough that could quadruple US ethanol production almost overnight and displace 900 million barrels of oil demand for gasoline. That essentially equates to 90 days of oil imports becoming unnecessary.

Another is natural gas. Since it is right off our coasts, we could use it to power vehicles. It would be cheaper than oil, reduce exports and be cleaner.

Here is the thing: either of those two events are at least a year off in the case of ethanol and probably almost a decade away for natural gas. That means China, India and a resurgent US demand will rule the equation until then. That means higher prices.

It may take a while and you may have to weather a hurricane or two that will pump a temporary rise in prices but I think if you are patient, you will be able to pick up the USO and the price equivalent of crude for under $100.

Disclosure: None

Comments

[John C. Lee:]

USO looks like it'll be trading in a neutral range for some time as most other commodities have done. The bottomline: the trend has broken and I expect the USO to keep testing this area before a final breakout or breakdown is established.

2008 Sep 04 04:55 AM

[mangolfer:]

Didn't it just break below the 200 day moving average?

2008 Sep 04 07:32 AM

[corley10:]

Don't listen to Pickens. He is involved with CLNE a comapny that sells NG to power cars. He is pushing his own business for profit. I don't understand why CNBC does not mention this conflict when he appears all the time pushing his energy plan.

2008 Sep 04 09:04 AM

[John C. Lee:]

mangolfer - it did break te 200-day MA, but its still 'hanging-out' or churning in that area. One final breakdown, and it's over.

2008 Sep 04 12:43 PM

[Urbane Gori...:]

I like T.Boone, but his 'aw shucks' demeanor hides a very canny businessman. As noted above, he **is selling something**...

jegan

2008 Sep 04 02:37 PM

[Kofi Bofah:]

The party is over for commodities and materials stocks. Do not expect much from Big Oil other than dividends and share buybacks. The independent producers will get hammered.

2008 Sep 04 03:04 PM