lewisabroad

Crude Sell-off: Solid Entry Point into U.S. Oil Majors

oil demand is highly ineslastic - that's why it took a doubling in price to cause a 3% reduction in demand in the US. Oil is worth whatever people will pay for it - where jjason $60 comes from is beyond me. It costs ~$3 a barrel to extract oil in Saudi Arabia or Iraq, $40+ to extract it from Athabasca tar sands. add in transportation and delivery probably jjason is right, but it is willingness to pay that sets the price - not production and delivery costs. Clearly a fraction of drivers in the US are not coping well with $4 a gallon hence the drop in demand and price. Combine that with a reduction in Chinese subsidies and you have demand destruction causing a slight excess in supply that results in a radical drop in price. That's how inelastic goods' prices behave in a market. The true speculators in this market are all those American drivers willing to pay $4 a gallon - not traders on wall street. Complain about the price, but until you trade in your f150 or H2 for a prius you aren't sending a signal to the market that the price is too high.
One way we get $60 a barrel oil is with price caps. Do you remember last time we did that? lines at gas stations? theother way is demand destruction on a much bigger scale than currently. remember the late '90's when gas got so cheap? This was due to heavy demand destruciton in asia due to the asian financial crisis combined witha bunch of new investments coming on line from 10 years prior.

Michael is right on the money with this one. A host of fundamentals points to a long term price rise in oil. Until several of the fundamentals in demand change (US energy policy and foreign subsidies being 2 big ones) there won't be any structural change. What we are seeing is the radical effect that a few percentage points demand reduction globally is causing on oil prices. The only thing anyone could accurately predict in this kind of market is volatility. The hardest part is going to be finding the lows. Long-term, the price is going to go up, but there are going to be a lot of retrenchments and bumps in the road as demand fluctuates. Production is pretty well tapped out globally - anyone who tells you that we haven't hit peak oil from a production standpoint is not looking at production data.
As for US energy policy, the only bit that is going to make a difference to the typical American as well as the balance sheet is programs that help with demand destruciton. That means increases to CAFE, tax breaks on plug-in hybrids and alt-fuel vehicles like those running on nat gas, and a gradually increasing tax on oil imports to fund those programs. The tax revenue would go directly to programs designed to reduce demand by small business owners and homeowners, like rebates for PHEV and replacement of oil -burning furnaces with efficient gas / heat pump / solar thermal systems. Any excess would be nice to bring down the defecit - another big drag on our economy paying interest to Japanese and Chinese treasury holders.

Offshore drilling would also help, but is a longer-term solution versus demand reduction schemes and delays the inevitable point at which we wean transport from gasoline.

Long-term, the best investment play is hold what you've got in this sector. Short term, we won't know if this is a bottom until we see how much demand has been affected by the decrease in price - some time in September. I expect prices to slide until we see an uptick in US demand or reduction of inventory.