Difficult to Make a Case

Some of the best news this economy is getting is reduced oil and gasoline prices. There’s no greater effect on inflation and inflation expectations than the price of oil.

It’s the end of the summer driving season and stockpiles are bigger than expected. Further, institutional investors are less and less interested in speculating in the spot price of oil. This is great news for consumers, the economy, and the stock market.

Although it is difficult to quantify, most Wall Street analysts believe that there was a significant, speculative premium to the price of oil over the last two years. This means that institutional investors were buying oil contracts because the price of oil was going up. These investors weren’t necessarily speculating in oil because of supply and demand issues.

Therefore, many believed (including myself) that there was at least a $10 per barrel premium to the black gold, just because of the influx of speculative institutional funds into the market. If the current trend continues, the price of oil could easily drop to $50 a barrel. This assumes, however, that there won’t be any new geopolitical tensions in the Middle East or other areas of the world.

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So, it is difficult to make the case for taking on new positions in the oil and gas business right now. If you own a large, integrated oil and gas producer, it will likely pay to keep holding for the foreseeable future. But, even if the commodity boom isn’t over, I would still be very reluctant to allocate new monies to this sector of the market at this time.

Of course, predicting the price of oil is a fool’s game. Perhaps we better just enjoy current gasoline prices while the price of oil is below $60. The winter heating season is fast approaching and domestic inventory levels can be used very quickly.