Saturday, May 24, 2008

Oil Prices

I'm a regular reader of John Mauldin and his investing insights. Today's newsletter was on oil prices, asking if we are in a bubble or if supply is being outstripped by demand. Go read the whole thing for some really good insights on the subject.

The short version of his article is that oil is in a speculative bubble right now. He makes a good case for a significant drop in oil prices over the next six months. He also makes the case (and has in the past) that the longer term trend in oil prices will remain up.

I happen to totally agree with Mauldin. While I'm perfectly happy to see oil prices rise (it seems to be the only way to get folks to wake up!), I think the recent parabolic rises are unsustainable and not supported by the fundamentals. Some pundits are suggesting oil will go to $150 or $200 per barrel this year. And maybe it will. But at some point the speculation portion of the recent runup in prices will pop and oil will fall precipitously. However, when it does fall like a rock, I feel it will "hit bottom" at around $100 per barrel, still significantly higher than the previous bottom. But as usual, when gasoline falls to around $3.00 to $3.50 per gallon, consumers will breathe a sigh of relief at the "lower prices" and the adaptation process will continue.

The fact remains that oil prices are on a long term trend line up, and will continue so until alternative energy sources are more widely utilized.

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