Anyone Think Oil Is In A Bubble?

[WheelsRCool]

So with oil continuing to increase in price, I was thinking to myself, "Wow, anyone invested in oil is likely making some $$$," but then I thought, "Every bubble in history is fueled partially bep eople who always think, 'This time, things are different,' as we saw with the tech bubble and housing bubble most recently, people thought tech stocks would keep growing and growing (even notable economists!) and they crashed, the same was said regarding housing, and that crashed too."

So I thought to myself, "Oil can't possibly keep increasing forever, can it?" but then I thought, "But IS this time different because of increased demand and limited supply...?"

So I Googled it and got two opposing viewpoints, one from Reason magazine (libertarian): http://www.reason.com/news/show/125414.html which says most likely yes, it is, and one from the New York Times economist Paul Krugman, who says, no, it isn't: http://www.nytimes.com/2008/05/12/opinion/12krugman.html

I was wondering what some of the investor folks here think? The articles directly argue each other. In the Reason article, they say that oil demand is inelastic, meaning if gas goes up by another dollar or so, you still have to fill your gas tank and drive to work. Over the long run, however, demand will decrease as people buy more fuel-efficient cars. They say it is primarily speculators driving oil prices right now, not supply and demand. However, the NYT article says the opposite, that if speculators drive up the price of oil, people will cut back on driving, turn down their thermostat, and owners of marginal oil wells would put them back into production.

I am not sure if I agree with Krugman (NYT) on the driving part, I think people already would have cut back on driving if they will do so, I don't know about the thermostat part (I hate cold!), regarding the oil wells, I have no idea with that but I would think that even with oil prices up, that the owners might be cautious to put them into production for fear that if prices drop again, this could be a problem; I don't think putting a well into production and then shutting it down again is as simple as flicking a switch. I don't know for sure though, I am no expert.

And Krugman also says that it isn't speculators, that this is just made up nonsense (directly contradicting the Reason article) and that it is supply and demand controlling oil prices, and that demand is squeezing supply. Reason says demand has actually decreased and surplus oil production is up, so...

What do you more knowledgeable folks think? Me personally, I am still guessing an oil bubble. Krugman says they were saying this back in 2005, but I mean the Dot Com sector actually started to collapse in 1999, but then recovered, then collapsed again in March 2000, then recovered again, and it wasn't until the Fall that stocks really started to crash permanetly, so bubbles can be persistent.

Part of me is a bit afraid that oil prices will keep increasing, but then the old historical "That's what they've said for EVERY bubble, that 'this time is different'" so I don't know. Also remember that the oil industry historically is cyclical, so prices should go back down at some point I'd think.

 

Dislike ads? Remove them and support the forum: Subscribe to Fastlane Insiders.

[CMCarlin]

We may be in a bubble, I don't know. I do know that the dollar's rapid inflation is playing a part in the rising cost of oil. If we start to see a stronger dollar in the coming months or years, we -may- see prices come down a little, but also maybe not because demand may keep it up as well.

 

[rxcknrxll]

I'd agree it *makes sense* that speculation and a weak dollar are the main causes of current oil prices. In this case, we're gonna pop sometime right? removed comment. Politics. We're in hugely interesting times; I'll say that much.

 

[andviv]

rxcknrxll, we don't discuss politics in this forum, please read the rules again.
Let's look at this from an investing perspective or we will have to close the thread.

 

Dislike ads? Remove them and support the forum: Subscribe to Fastlane Insiders.

[CMCarlin]

rxcknrxll, we don't discuss politics in this forum, please read the rules again.
Let's look at this from an investing perspective or we will have to close the thread.

Agreed, and I changed my comments to ensure that.

 

[stielle]

I think we may be in a bubble, but the days of .99 gas are gone. That being said, I think in the future, the gas prices will come down more. This would be due to a (hopefully) stronger dollar, but more likely the decreased consumption due to more efficient cars.

As an investor, I think its still a time to buy. It will take some time for the cars to be developed and enough of them to hit the market to make an impact. The ratio of hybrids on the market is still very very small. Then don't forget the fleets. Many are either diesel or natural gas already, so they won't be changing over as fast. Those that do change over will do so in a gradual process, vehicles are expensive!

So with the dollar down, and super fuel efficient cars nowhere in the very near future, I'd buy.

disclaimer: I'm a noob investor. While I wouldn't tell anyone anything differing from what I would do, only take what I say as an opinion, not advice. Otherwise,we both might lose money together.

 

[WheelsRCool]

Personally, I don't think even the dollar strengthening will lower gas prices much, but if speculation right now is playing a big part, who knows. I need to get to reading Security Analysis

 

Dislike ads? Remove them and support the forum: Subscribe to Fastlane Insiders.

[TaxGuy]

the funny comparison b/w oil and the housing bubble is that the overnight mortgage co's that came out and preyed on the low IQ lower-middle middle class who thought they could get way more house than they could afford is what not only led to the burst of the bubble, but with all that money coming from nowhere it was the supply and demand of the dollar itself that caused it to sink and a world commodity such as oil shot up due to it...

here's to hoping that the housing market stabilizes soon so that in turn the dollar will fall into place and that gas can go back down to a "reasonable" $3.50/gal and yes I know we shouldn't complain, I saw first-hand that gas was ~$6/gal in Austria as it's sold by the L and the Euro was ~$1.35, now with it being ~$1.55 and gas going up most of W. Europe is paying the equivalent of $8+/gal and there the cars are rated at L/100km as opposed to mpg which to put into perspective VW has a concept that does 100km in 1L of gas which is a mind boggling 248mpg

granted that car will never see production, Europe does have a plethora of micro-compacts that get 40+ mpg, while the best we get is the Prius which is the only auto over the 40mpg barrier while we have all the SUV's and trucks that they don't which get <20, some <15mpg, yet we have cheaper gas

personally I am a sports-car guy, but at the same time hate huge trucks and SUV's(unless it's the rare occassion that I need to haul something, despite being 6'4" I like something smaller that I have more control of), but even now I'm thinkin on ditchin the VR4 which modded now only gets about 14/18 city/hwy while my bike(F4i) gets 35-40mpg... so I might sell myself out and get an early 90's Civic SOHC 5spd for that nice 35/41 so I can start road-tripping again... something I've never really got to do in the VR4 thanks to gas being over $2.50 since I've had the "funds" and free-time to do it, but when gas is about 50% of the budget for the trip(I like to skimp on food and hotels as I'm going for the sights... although at times I splurge) it becomes much more difficult to do :smxE:

 

[MJ DeMarco]

I think the real value of oil is overvalued due to speculators. However, I don't think it will go down anytime soon. Investors are clamoring for the next big thing. First Tech Stocks, then Housing, and now, its OIL/commodities.

Access to markets for any investor is now readily available -- this is creating a spectacular run-up on prices. When the middle-class gets into these markets seeking crazy returns, prices skyrocket and values become unsustainable. Years ago, the average-joe-investor couldn't invest in oil unless they hit the futures market (which most would never do) -- today, everyone with a brokerage account can invest. This unprecedented access to markets is adding the run-up.

So my answer to the question -- I think oil will continue to rise as more speculators enter the market and drive prices up. Add in a weak dollar which will continue to erode and you have the makings of $180 oil.

Will it implode in bubble-like proportions? I don't think so but there will be periodic pullbacks of 10-15% like we see in all rapid ascensions.

 

[Hoop]

I think we have gotten ahead of ourselves, but the trend is correct. Expect some pull back, but the good 'ol days are gone.

There are many who believe, and a significant amount of available supporting evidence, for "Peak Oil". The concept that Known Reserves and Production have hit their peak...but demands continues to grow. The cross over point is generally what gets debated. Was it 2005? Is it 2012? Or 2045? I think we're spitting hairs.

Bad Money, by Kevin Phillips talks about this ad naseum. Defintiely don't buy it...skim it on the shelf if you're interested.

-Hoop

 

Dislike ads? Remove them and support the forum: Subscribe to Fastlane Insiders.

[Banthaman]

Living in the Midwest I see not only the effect of the cost of energy in general but also the cost of commodities/ethanol. Looking at it globally is really the only way to really get a feel fro what could happen. European markets are and have been paying more for gas than in the USA and India and China are proving to me forces in that market as well though oil I don't think is as big an issue as food. Already there are food shortages to where people are calling for reduced ethanol with starvation on the rise. That coupled with the uncertainty of any given growing season and all currently it would take is a major agricultural indecent/weakness and food will be far more costly than gas ever was, and have rationing ... abstaining from political discussion, this fall is going to be very interesting indeed.

 

[PEERless]

Oil will decrease in value with the advent of some technology/methodology or mindset that makes it obsolete.

 

[Hoop]

Oil will decrease in value with the advent of some technology/methodology or mindset that makes it obsolete.

This is potentially true , to a point. When we talk about OIL, we generally mean crude oil. There are other forms of oil.

On a side note, the Dutch had wind&water, the UK had coal, the US has oil. When these countries were at the top of their game, their economies were based on these energy sources...but each was or will be replaced, both empires and energy.

Which "empire" is preparing their economy for the next great energy source? It aint China.

 

Dislike ads? Remove them and support the forum: Subscribe to Fastlane Insiders.

[deanbrew]

So, if one thinks that oil prices are due to correct or pull back, how do you invest to profit from declining oil prices? Is there a vehicle to "short" oil prices? Is there a way to "bet" on oil prices declining without committing to a particular expiration or drop-dead date?

 

[WheelsRCool]

Oil prices were dirt-cheap during the 1990s I think because of the cyclical cycle of the oil industry. Historically, adjusted for inflation, I think gas prices (which are directly influenced by crude prices) has been on average about something like $2.90 to $3. Hopefully crude will come down again to allow gas to be priced at the inflation equivalent of about $2.90 at most.

 

[Edge]

So, if one thinks that oil prices are due to correct or pull back, how do you invest to profit from declining oil prices? Is there a vehicle to "short" oil prices? Is there a way to "bet" on oil prices declining without committing to a particular expiration or drop-dead date?

When a market has no fear and you expect a correction, I love buying out of the money put spreads. I did this last month using the ETF OIH and made 60% in about 3 weeks.

Here's a real example for ya, on 4/18 I purchased the 195 May/July OIH for $4.77. I sold that spread on 5/13 for $7.63. While reviewing the trade after I was out of it, I noticed the price of OIH was almost exactly where it was the 2 weeks prior when I bought the spread. The price of the underlying was the same, but my position had increased 60%. A bigger pull back would of made me a lot more money, but I made money off of a little bit of fear of a correction being pumped in the market instead of the actual correction happening.

If you aren't into options, another vehicle for you might be the ETF DUG. It is an ultra short oil & gas ETF.

 

Dislike ads? Remove them and support the forum: Subscribe to Fastlane Insiders.

[Hoop]

If from some other reports I've read, by 2009 there'll be 4 million bpd extra supply of oil, then oil might turn another way.

Bear - don't we have to factor in the cost of getting at those reserves...the Gross Margin issue for each barrel of oil? The Saudi stuff has been easy to get because the soil is so porous. The Russian reserves under the Artic/Polar Ice may be huge, but if the cost to extract is large, so will the cost of the final products.

 

[rxcknrxll]

rxcknrxll, we don't discuss politics in this forum, please read the rules again.
Let's look at this from an investing perspective or we will have to close the thread.

I appreciate and am impressed by the moderation. I'm not used to having to watch what I say. My apologies.

 

[WheelsRCool]

When I say I think oil is up because of speculators, I don't mean it in a scapegoat fashion at all, I just mean I think it is up because of speculators. According to the Reason article, oil supply has been able to meet demand multiple times and now demand has dropped off a bit it seems, yet the price keeps getting yanked up.

 

Dislike ads? Remove them and support the forum: Subscribe to Fastlane Insiders.

[rxcknrxll]

Right, people are driving less (IN is expecting nearly 400k fewer people on the road this weekend compared to last year) and more efficient cars, and prices are still going to be over $4. Probably hit $200+ a barrel right? At least from what I've heard. It's not about demand as best I can tell.

 

[hakrjak]

Look at what the price of Gold has done due to the falling dollar, and then you will probably start to believe that Oil is still dirt cheap.

In Europe they're paying $8 a gallon, so we've still got it pretty good over here.

Everything is relative.

- Hakrjak

 

[hakrjak]

When I say I think oil is up because of speculators, I don't mean it in a scapegoat fashion at all, I just mean I think it is up because of speculators. According to the Reason article, oil supply has been able to meet demand multiple times and now demand has dropped off a bit it seems, yet the price keeps getting yanked up.

Every time I've seen demand dip, and prices drop -- The bad guys controlling the oil seem to engineer some plot to make the price go back up again.

Nigeria bombs a refinery.... Or kidnaps some oil company workers... Iran buzzes patrol boats past our ships in the Persian gulf... Someone bombs a pipeline in Iraq.... A bomb goes off in a Saudi Arabian market, making the royal family's reign look fragile....

There is no end to this, until we find a viable alternative fuel source, or unless we can drill for oil on the moon and find a cheap way to bring it home

- Hakrjak

 

Dislike ads? Remove them and support the forum: Subscribe to Fastlane Insiders.

[randallg99]

I think the real value of oil is overvalued due to speculators. However, I don't think it will go down anytime soon. Investors are clamoring for the next big thing. First Tech Stocks, then Housing, and now, its OIL/commodities.

Access to markets for any investor is now readily available -- this is creating a spectacular run-up on prices. When the middle-class gets into these markets seeking crazy returns, prices skyrocket and values become unsustainable. Years ago, the average-joe-investor couldn't invest in oil unless they hit the futures market (which most would never do) -- today, everyone with a brokerage account can invest. This unprecedented access to markets is adding the run-up.

So my answer to the question -- I think oil will continue to rise as more speculators enter the market and drive prices up. Add in a weak dollar which will continue to erode and you have the makings of $180 oil.

Will it implode in bubble-like proportions? I don't think so but there will be periodic pullbacks of 10-15% like we see in all rapid ascensions.

1st- yes, we are in a bubble.
2nd - yes, it will pop. But not for a long time... after the olympics end in china, we may see a slow down in pent up demand

speculation has driven up the price by approx 5-10% so the impact of speculation is rather minimal...

we are witnessing the truest form of supply vs demand in motion. There is more worldwide usage of oil than ever before and there is a clamoring up for grabs match for as much as of it as possible... just one of many tidbits I recently read: there are 765 cars for every 1000 Americans in the USA while in China there are only 5 cars for every 1000 Chinese. China plans on doubling car ownership within 3 years.... Chinese demand for oil reminds me of a teapot lid that's been held down and is ready to boil over... and when that happens, we will hit much higher oil pricing.

side note: the USA is at a disadvantage since most other countries have nationalized programs to import oil thus subsidize the consumers...

btw - nat gas hitting 13 today is putting some nails in the economy's coffin....

Now, for my serious rant: what we are experiencing in the markets is a huge transfer of wealth from one sector to another and it's caused by the laws of unintended consequences.

There's a theory I agree with that's floating out there that the LTCM crisis of the late 90's prompted Fed bailouts designed to save world banking but instead led to the Nasdaq bubble... then the Nasdaq bubble prompted huge fed cuts to improve liquidity but led to the dramatic housing run up.... and now, the recent Fed Bailouts designed to save the mortgage/credit/housing markets is shifting dramatically to commodities. *which is where the problem lies... the commodities result in an "end use"... after we use oil, it's never again up for being reused, unlike stocks or housing... and this is a very damaging component to the

hey, it's just one man's opinion but I put my money where my mouth is...

 

[TheGreatBear]

When I say I think oil is up because of speculators, I don't mean it in a scapegoat fashion at all, I just mean I think it is up because of speculators. According to the Reason article, oil supply has been able to meet demand multiple times and now demand has dropped off a bit it seems, yet the price keeps getting yanked up.

I know. But you have to admit, it is a very popular reason floating out there right now. I know people on this forum are bright enough to get to good conclusions, but I'm sort of suspicious when some explanations become too mainstream...

 

[randallg99]

to add to my thoughts from prior post - there is so much uncertainty in the markets that we just may see $100 levels just as easily as we see $200 levels this year... the volatility is astonishing and it will be difficult to sit tight with certain positions. It's much easier to sit on gains and absorb some of the volatility than it is to jump in at any point....

ultimately, world demand has not slowed versus a diminishing resource... long term, all indicators are pointing to much higher oil but wtfdik?

 

Dislike ads? Remove them and support the forum: Subscribe to Fastlane Insiders.

[lightning]

About a year and a half ago, I sold my beloved sports car in order to pick up some seed money to start investing in the market. At the time, I had planned on investing in oil (about $65-75 a barrel then), but decided against it in favor of a few other vehicles.

MAN do I wish I had bought that oil. LOL

 

[hakrjak]

About a year and a half ago, I sold my beloved sports car in order to pick up some seed money to start investing in the market. At the time, I had planned on investing in oil (about $65-75 a barrel then), but decided against it in favor of a few other vehicles.

MAN do I wish I had bought that oil. LOL

Hey you would have only doubled your money that way. I sure hope you invested in real estate instead and made a lot more than double

- Hakrjak

 

[Pinnacle]

About a year and a half ago, I sold my beloved sports car in order to pick up some seed money to start investing in the market. At the time, I had planned on investing in oil (about $65-75 a barrel then), but decided against it in favor of a few other vehicles.

MAN do I wish I had bought that oil. LOL

Man, that's a heartbreaker. I wish I had had my head on straight when I graduated high school, this is when gas was $0.79/gal...not a typo...you all remember. I would have jumped all over either oil futures, shipping companies, or stocks of companies involved in the supply chain.

This is such an intriguing time, in my opinion. I'm personally not buying the "peak oil" argument. If OPEC and non-OPEC producers choose not to increase supply, I think it has more to do with not wanting to truly dry up their resources rather than obstinacy. We will need the extra presumed output from those wells in the long-term.

On another note, I don't understand why some gas stations are raising prices on the same shipment of gasoline they had originally received from the distribution center within the same week. I can see placing mark-up on a new shipment you receive, but the same one? That's where I draw the line on greed.

It's fascinating to me to learn about this colossus of an industry. Learning the supply chain, from reserves to oil tankers, from refineries to distribution centers and then to gas stations. I've learned a great deal about what components make up the price of gas. Plus, there are SO many factors that contribute to the rise and fall of prices.

Personally, I'm loving every minute of this because I don't think the buy signals have diminished yet. There is still good investment to be made here.

 

Dislike ads? Remove them and support the forum: Subscribe to Fastlane Insiders.

[lightning]

Hey you would have only doubled your money that way. I sure hope you invested in real estate instead and made a lot more than double

- Hakrjak

LOL very true my friend. Fortunately, I did indeed diversify, and although I lost a few bucks here and there in the market, I also picked up my first investment property, and am now sitting on a nice chunk of equity already.

 

[Hoop]

So, what do we do?

1) Avoid Oil because it is in a speculative bubble?
2) Play the bubble to the upside.....or, play it for the down side?
3) If you're gonna play it, how will you play it? Producers, equipment, pipelines, shipping, or do your own prospecting?

Personally, I started dabbling in prospecting last summer.