Oil Price Lower on Inventory, But It Can't Go Much Lower


". . .the fact remains that in most parts of the world, oil consumption is going higher."

Yesterday's release of the U.S. inventory numbers of oil and oil-related products had a quick and meaningful impact on prices. We have seen $10 oil in the '90s and sub-$20 oil as recently as 2002. Can we see those prices again? Let's take a look at the fundamentals.

For sure we could see a further drop in oil prices, but to what point? Could we once again see $10 oil? Not likely, even with the fantasy idea that the so-called evil speculators are and will continue to be driving the price of oil down.

Even with a drastic drop in the price, it would be short lived unless some game-changing technology displaces oil as the leading source of gas and diesel. Short of a game changer, it's hard to picture a world that will see sub-$20 oil again.

On the demand side, we have several major changes since the last time oil was at $20 per barrel. The U.S., China, and India all use more oil than they did 10 years ago. I guess the Europeans like riding the bus and train as their increase in consumption is much lower. Regardless of what Europe is doing, the fact remains that in most parts of the world, oil consumption is going higher.

On the other side of the coin, you have the supply side. While many will tout the peak oil theory, I do not feel we are there yet. Canada and the U.S. have very large oil shale deposits available, but the cost to extract this oil is much higher than in most of the other fields in the world. One more factor is that much of the world's supply of oil comes from volatile places.

As a result, I find it very comfortable to be writing out of the money puts against USO (an oil fund ETF) for February, March, and April.

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