Tuesday, June 2, 2009

The right price for oil

AlphaNinja - Oil is trading at $68 per barrel, up over 100% from its lows, yet well off last year's ridiculous $140ish highs. Several quarters in a row have shown decreasing global oil consumption.

A fair price for oil is probably $40-$60, and that's only a best guess. In 1998, with oil at $10, the world used about 74million barrels per day. We now use about 84million barrels, an increase of 14%. Yet the per-barrel price is up 480% - 34 times as much as the underlying consumption. Yes, worries about "peak oil" are plentiful, but the oil majors are replacing their reserves at impressive rates. The proper price is impossible to determine, so oil should only be traded when the prices hit extremes, and even then just with small positions.

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