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How Cheap Can Oil Get?

I'm really a hard-core tech guy and normally stay away from "resources", but when oil took on a "7" handle my ears perked up. I considered speculating a little on cheap oil, but it still seemed to be too much of a "failing knife". $75 really started getting my attention, but I figured I'd wait for $70. Now... we're looking at a "6" handle on the price, so I'm struggling mightily to refrain from pounding on the "Buy" button.

Could it go lower? Sure, just like Facebook (NASDAQ:FB) went lower when I bought at $19, but what are the odds of, say $50 oil?

So, I figure I could buy some $66 oil, via the (NYSEARCA:USO) and (NYSEARCA:OIL) ETFs, and then buy more each week as it either ticks lower or stays roughly where it is until it bounces back to stabilize at a more sane level.

Or... maybe not. I mean, "resources" are really not my thing, any more than Gold (NYSEARCA:GLD) is.

My personal belief has long been that oil is really a $25 commodity and that the massive rise to $100 was primarily due to hedge funds and banks taking physical delivery and grossly distorting the market, in contrast to the traditional market where consumers such as transportation companies and chemical companies trafficked in energy futures to manage their resource expenses.

But just last week we saw a Senate investigative report about banks having unwarranted direct involvement with commercial aspects of commodities, and even Fed disclosure that they would soon be regulating bank involvement in such commercial enterprises, so it is now no surprise that banks are seeking to reduce their direct involvement with commercial commodities enterprises. I mean, it is one thing to make loans to companies, but entirely another matter to be directly involved with their operations or even controlling or even owning them.

IOW, a big portion of the decline in commodities could simply be due to finance companies exiting from direct commercial involvement. And hedge funds simply reading the writing on the wall and flipping the switch from "risk on" to "risk off".

That does beg the question of what the "natural" price of oil would be absent the disintermediation of entities who are neither producers nor consumers of these commodities. Maybe my old $25 number is spot-on, or maybe the number is $40 or $80. The point is that nobody knows.

The fact that OPEC and Russia decided not to reduce supply strongly suggests that the steep price decline is more likely what I suggested above, and that oil will stabilize as soon as banks and hedge funds have effectively exited from direct commercial involvement with commodities enterprises. Although it is still reasonable for hedge funds to own stock in resource companies, as long as it's not just to manipulate commodities prices.

All of that said, I may take a very modest flyer, just on principle. Or not. I might be much better off sticking with Solar City (SCTY) and Tesla (NASDAQ:TSLA). Or maybe a little of all three.

And what about the impact of cheap oil on the rest of the U.S. economy? A classic mixed bag. Cheap oil will cut the cost of a lot of consumer goods and services, but also cut some jobs and investment in the energy sector, which was previously one of the brightest sectors in a lackluster economy. OTOH, my belief has always been that an economy is healthiest when it alternates "cylinders" that are firing, so that one or more sectors have a chance to restructure and rejuvenate and recover even as others are booming, and that we continually cycle between sectors that are booming and rejuvenating.

-- Jack Krupansky

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Additional disclosure: Long Facebook (FB), Solar City (SCTY), and Tesla (TSLA).