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Investing In Oil

By: Steve Johnson

11/11/2008 - 114 Comments

In the last two years, oil prices have increased from $60 per barrel to $145 per barrel and now back down to $60 per barrel. 

The global financial panic seems to have scared off oil investors who are now betting on a dramatic decline in oil consumption.  The global financial selloff has put oil under a lot of pressure. 

The question is how much lower can oil sell for and how long will it stay at these prices.  The price at the pump is now almost $2 per gallon, while it was over $4 just six months ago. 

I think oil prices could rebound to $100 per barrel within the next six months to one year and here are a few reasons why;

  • Oil supply is declining
  • OPEC is considering a drastic production cut
  • Global consumption will continue to increase
  • Dollar weakness may drastically increase dollar value of oil

Oil is the most useful source of energy in the world and will be for at least the next few decades.  Perhaps the primary reason for oils drastic price drop has been the increase in demand for dollars.  The relationship between oil and dollars is unique, because oil is traded in dollars across the globe.  The value of dollars is therefore intrinsically related to the dollar value of oil.  The dollar rally that we have experienced last month has been a major factor in decreasing the price of oil.

This has decreased the cost of oil for American’s while increasing the cost of oil for the rest of the world.  If (or should I say when) the panic is over and the US government has printed enough money to jolt the economy back to life, investors around the world are going to sell US Treasury Bonds, causing the dollar to lose value and oil prices to increase.  This move is has not yet happen, but I think it could start any day now.  As the dollar decreases in value relative to other currencies, oil will become cheaper for everyone else (outside the US).  With lower prices at the pump for Asia, Russia and Europe, their demand will continue to increase.

My Investment

If this plays out like I’m thinking, oil is a good investment at today’s prices. So, I put my money where my mouth is and yesterday invested $1000 in a fuel bank in my local area. My $1000 investment bought me $1000/2.39 = 418 gallons of gas, which I can use at any time.  My plan is to wait a few years until gas returns to $4.50 per gallon before using my gas that I bought at $2.39 per gallon.   In two years, I expect my investment to double its value, giving me a 50% annual return on my investment.

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