Enterprising Investor Forum

OIL: How long will this last? Wednesday, December 3, 2008

Using the iPath Crude Oil Index (OIL) in this graph, we wanted to highlight the spectacular fall in crude prices:

The question most people are asking is: How long will this last? Well, apparently, the technical specialists seem to think that there could be another 50% slide from current prices and more fundamental analysis also suggest a bit more down side, but not more than another 20%. However, the bottom line is that, as the worldwide economy worsens and governments fight to get countries back on track, OIL prices will suffer.

One of the key issues here is how OPEC will deal with the slow-down and if they will start to adapt supply but cutting production. This is a tricky balancing act as if they cut too much, once things start to get better the increased demand will probably lead to a jump in prices and with speculators jumping back in, we could see another prolonged spike. On the other hand, if prices fall below 35 USD per barrel, something drastic might have to be done, as this seems to be an important P/L benchmark for the OIL industry (most planning is done at 50-55 USD levels – meaning a 40-50% gross margin).

Nevertheless, what is safe to say is that:

• Commodities always follow these kinds of cycles
• The world is far from being able to replace OIL will alternative energy in the short-term
• The world-wide economy will slowly recover and so will emerging market growth
• We feel it is extremely likely that OIL prices will move back to a minimum of 80 USD per barrel in the next 12 months.

As always, we welcome your comments!