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The End Of “Cheap Gas” Will Come Sooner Than You Think
By Sean Hyman on January 6, 2009 | More Posts By Sean Hyman | Author's Website
2008 brought about mixed emotions. On one hand we had cheaper gasoline than we’ve seen in many, many years (the good). Then we had the economy sliding off the cliff (the bad) and finally the unemployment rate shooting through the roof (the ugly). Ouch!
So everyone was glad to see gas go down from $4 a gallon to a buck and change…however, everyone knows someone out of work now and that’s very scary!
Oil futures are predicting $60 oil by next December. I think it will at least hit that and could head even higher by then.
Some of the stimulus that the government has given to the economy will have an effect soon. However, economies are like slowly turning ships and not like speed boats. Therefore this will be a process and not as quickly as we all would like. But…it will turn the economy around.
Therefore as the economy turns upward, it will put more of a demand upon the supply as OPEC continues to restrict the supply. So the demand will increase as the supply decreases for now.
This is bringing a halt to the decline in oil prices into a sideways range and then later on, a new uptrend. This will also carry over into gasoline prices and you will see them do likewise. Check out the chart below.
Gas prices break their free fall!
Any of you out there that are technical traders will note how stretched the price has gotten away from the 200 day moving average (blue line) and how the downward pressure on the MACD has been broken.
Both of these (the fundamentals and the technicals) are calling for a near term bottoming in gas prices which will likely turn into a volatile sideways range from here for a good while. Then later on in the year, we will likely see gasoline head even higher as it breaks into an uptrend once again.
$2 to $3 gasoline is coming once again! So prepare now!
After all, much of the Middle East needs $75 to $100 a barrel oil to meet their budgets. So you can be sure they will give it their best shot to get as close to that area as they can.
Therefore it won’t be long before gasoline goes into the $2 area nation wide and in the latter months of the year we will likely be back to the $2.50+ level.
When the economy is hitting on all cylinders once again, expect $3+ a gallon once again.
You see, there’s a fundamental problem out there that will take time to solve…much longer than many think. Yes, alternative fuels will eventually take much of the sting out of oil prices. However, that’s many, many years away. If America were very fast, it might affect oil in 10 year’s time.
You see, if all vehicles produced today became “alternative” to where they had little to no need for oil (more specifically gasoline), it would take at least 5-10 years from that point to get enough of the nation weaned off of gasoline. Then that’s got to happen in the rest of the world too. Don’t forget that China and India’s middle class is growing like never before. They are getting off of those bicycles and into cars right and left.
This “extra”, new demand alone is enough to ensure that oil prices head higher until the “problem” is solved with oil.
More cars hit the road all the time, here in American and abroad. Therefore demand will be driven up once again!
Also, for any of you that were old enough to be around in the 1970’s, you’ll remember that many families were “one car” families back then. You look at that picture here in America today and you see that mom, dad and all of the teenagers have their own car.
So we’ve multiplied the demand here at home and also the demand abroad has expanded. There haven’t been near enough “oil finds” to compensate for this. In fact, in the 1970’s is when we went from being a net oil exporter to being a net oil importer. Our own oil supplies at home peaked back then.
Today, America gets most of its oil from Canada. Many mistakenly think that it’s Saudi Arabia or many other places in the Middle East. We do get some from there but not the bulk of it.
However, Canada loses a lot of their incentive to pump oil out of the “oil sands” because it’s very labor intensive to get that oil out and refined. Therefore it requires a high oil price in order to justify getting the oil out since the costs of extracting it are so much higher due to it being in the “oil sands”.
So there a number of reasons why oil will turn around and head higher which means that gas will tag along and do much the same.
Remember, back in 1999 when OPEC cut production 6.9%, it eventually caused oil prices to double off of their lows that year. If that same scenario played out again, you could easily see oil hit $60 - $70 a barrel. Once that happens, say goodbye to “cheap gas” once again
Therefore, you could get prepared for this in a couple of ways. The first thing to do would be to buy the oil tracking ETF (symbol: USO). That way, as your gasoline bill goes up, at least you are “recouping” some money as your oil investment goes up over time too.
The second thing to do is to make sure you are positioning yourself with a car that gets good gas mileage. If you think that you skirted the high gas “spell” with your gas guzzler, you’ll be surprised when you see it come back once again. Therefore, get rid of that “guzzler” while gas is still cheap and you stand a chance of getting rid of it. People will avoid it “like the plague” when prices rise.
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I agree oil is going higher and gas is going to follow. I think $80 might be a good top for oil which would put gas around $2.50-$3.00 I think. The only thing that can hold it down at the moment would be a collapse in the equity market in my opinion.
That said I just hedged my fuel for the next two years. I looked at doing something similar with USO until I found petrofix.com. I did not really want the tracking error from USO to gas prices so I ended up purchasing from them.
With petrofix, you’re purchasing more or less an insurance policy, no ownership. USO provides ownership. It will double one day.
All insurance type investments bets that they will take in more than they will have to pay out. That’s how they’re profitable. You’re betting that they will have to pay out more than they think they will. If they’ve done their homework, they will be right and it will be a viable, profitable business venture for them. However, in the end…you’ve paid out premiums without any ownership of anything. With USO, when oil goes up, you gain money.
So nothing wrong with the petrofix approach…it’s just not something that is a wealth builder over time. It’s a defensive mechanism and I’m talking about offensive mechanisms that create wealth for you over time.
Hope this helps. Thanks for taking the time to read my article and to comment.
Yea your right I was looking at it more along the lines of risk reduction and not really as an investment vehicle.
Any opinions on UCO over USO?
USO is not leveraged and safer while oil still tries to bottom. UCO might be fine to add in once oil is for sure in an uptrend. Then you’d want to only buy it on a dip. Just realize that UCO will be extra volatile. So that’s why I say wait until its in an obvious uptrend if you mess with that one.
That way, the ETF doesn’t get that close to zero on you if the bottom isn’t near just yet. Because leveraged ETFs can be a bit more tricky in the timing of the entries.
In USO, it goes up basically at the same pace as WTIC crude yet is a bit cheaper in price than the “per barrel” price of WTIC crude.
So I’d say, USO…bought all with cash, no margin trading.
Sean have you ever check out DXO…cheap and attractive.
Yahoo businesss summary:
BUSINESS SUMMARY
The investment seeks to track the price and yield performance, before fees and expenses, 200% of the daily return of the Deutsche Bank Liquid Commodity index - Optimum Yield Oil Excess Return. The fund allows investors to take a leveraged view on the performance of crude oil. The index is a rules-based index composed of futures contracts on light sweet crude oil (WTI) and is intended to reflect the performance of crude oil.
Sounds like a great deal doesn’t it?
What’s good about it is its low ETN price…however, that’s also what’s bad about it. It’s so close to zero that it wouldn’t take much of a drop in oil to really get close to zero and have a huge percentage drop for you from here. The same goes with the double ETF UCO.
Better to deal with things like this when there’s an actual uptrend in place rather than trying to pick a bottom with them.
Pick a bottom with USO, all cash…no margin trading. Be patient and hold on until it doubles at least.
In the time, once oil does in fact break back out to the upside…then if you want to add on a small position in UCO or DXO with a very small speculative percentage of your portfolio, then so be it.
Those are just my personal opinions. Thanks for taking the time to read and comment on my article.