Oil Prices Fall Back to “Exorbitant” Levels:

I am lucky to be alive considering the force with which I jerked the steering wheel of my car as I pulled off of I-95 yesterday evening. What else was I supposed to do? I saw regular gasoline selling for $3.99 per gallon.

As a nation (at least in the Northeast), we are at the point where those prices, which we once thought to be not only expensive but outright obscene, are now a beautiful mirage in the middle of our panic-filled desert. As I pulled in to gorge myself, some nervousness came over me… I had a fear that the station may have closed down a month earlier and neglected to take their signs down. Luckily, I was wrong and I practically filled the empty water bottles in my car with the stuff.

Oil prices, investor speculation, and how we got into this mess

The story of what ended us up in this place could probably be condensed into 300 pages or so, none of which you feel like reading or I feel like writing. So let’s make it simple:

We use a lot of oil, there’s a finite amount, and the some of the countries loaded with this natural resource walk the line of sanity on a regular basis.

Many of you have heard the saying “nothing draws a crowd like a crowd”. As oil prices increase, fear pervades because it is a natural resource so closely tied to many parts of our everyday lives – most notably our beloved automobiles. This fear breeds speculation, and that speculation breeds fear, and round and round we go.

In the opening quarter of 2007 – only one and one half years ago – light crude was trading in the neighborhood of $60 per barrel. At its peak a couple of weeks ago, a barrel of oil traded at a level just above $147. Has anything happened from point “A” to point “B” to warrant a 145% price increase? The answer is “no”.

Yes, the world has used more oil. Yes, there are concerns about unrest in the Middle East. Yes, there are debates about whether we’re going to venture north to Alaska, push a few caribou aside, and pump out some black gold.

But no issues that are worth a 145% price increase.

I realize that oil has recently taken a slide, getting back to (as of this afternoon) $124.44. Why, that’s nearly a 15% discount from the high! If you look at the chart, it looks like it may have broken a trend! Does this mean it could keep coming down?

Maybe. But, if you’re waiting for $2.50 gallons of gasoline, I don’t have any clever words for that.

To get to this price, oil would have to go back to $62 per barrel.

(Silence).

US consumers drive less; Russia and China could care less.

Please ignore any forwarded e-mails begging you to participate in a “gas-out” day (in which no one would purchase gasoline for one day), because the brilliant minds who formulated that literary work of genius failed to consider the next day – a day where twice as many people would need gasoline because they couldn’t get it the day before.

We can limit our usage all we like, but do not forget that only half of all crude oil in the US is used to create gasoline (the rest is used for diesel fuel, jet fuel, heating oil, and others). Unless we plan on telling people not to heat their homes and truckers not to deliver groceries, we will not be able to curb this use of oil to the extent that we would like by simply limiting our driving habits.

What’s worse, we can’t possibly keep up with increasing demand throughout the world.

The number of automobiles in Russia is climbing exponentially. In the past five years, the number has tripled, growing by 60% in 2007 alone. It will break the 5 million mark sometime in 2012. Let’s not even discuss the reality that Russia will become a net importer of oil by 2020.

China had about 20 million automobiles on its roads in 2005. Not a problem if you ignore the fact that this number is on pace to rise seven-fold by 2020.

More cars mean more oil consumption. Here’s the bottom line: curtail your driving habits to save yourself some money… but don’t expect it to lower oil – and hence gasoline – prices anytime soon.

Buy or sell? Predicting the future of oil futures…

Wouldn’t it be great if we could all just play nice, perhaps agreeing to cut oil prices in half for the good of everyone? Facing the impossibility of a Crude Oil Hands Across America, I have made the decision to analyze the inevitable and find the road to profits.

Oil prices have fallen, and may still be falling. But my guess is that they won’t fall much further. We may have a short-term downward trend, but in the long-term we are still in a massive uptrend in this commodity.

Not every investor feels comfortable investing in a commodity such as crude oil, especially because there is so much emotion tied – or more appropriately, handcuffed – to each barrel.

Let’s slip into the comfort zone of some equities instead: energy stocks.

British Petroleum (BP), Chevron (CVX), and Lukoil (LUKOF) are three energy stocks that have fallen nearly 20% off their recent highs, and technically coming into strong support levels. Whether you’re a believer in chart analysis or not (and I happen to be a faithful worshipper), it’s tough to ignore.

If your portfolio or your stomach does not warrant consideration to these individual stocks, one can see the same trend in several energy-oriented mutual funds. As one would expect, such funds as AIM Energy Fund (FSTEX), Vanguard Energy Fund (VGENX), and Fidelity Select Energy (FSENX) are all following the same trend: recent downturns, coming into some strong support.

Could these stocks and funds fall further? Sure. But I doubt it.

I’m not saying “buy”. I’m saying whatever you do, don’t short.

By John K. Whitehall
Analyst, Bourbon & Bayonets