If there’s one thing I’m certain of, it’s that casino owners don’t have a soft spot for gambling addicts.

In the same vein, auto body shops don’t want you to drive safely and Norton and McAfee don’t give a crap who’s hacking into your computer (and are probably hoping it continues).

You shouldn’t feel bad either. In our free market economy, no one is stopping you from profiting from oil the same way the big boys do.

Currently, the price of a barrel resides right at $100. That’s a 32% discount from the high only two months ago. Admittedly, I didn’t even think it would drop to this level so soon. And I’m ready to start picking some of it up for a myriad of reasons.

A couple of good questions about oil speculation

If the price of oil pointed to a “bubble”, then how do we know that this bubble has completely burst? Couldn’t it drop some more? Sure. However, there’s one important difference between this bubble and one such as the technology situation that occurred in the late 1990s:

You don’t need Yahoo! to run your car.

If a tech company goes bust, there’s two dozen clones delving out products or services you’re looking for. If we don’t have oil, and hence gasoline, we can’t simply fill our gas tanks with Gatorade.

Let’s look at a weekly chart of crude oil over the past couple of years:

The final blue tick is the current price level. Ok, let’s get into it.

Some technical analysis backed up by fundamental analysis…

That’s right, I said fundamental analysis. But first things first.

Technically, one could look at the $100 mark as a major support level, given the highs from late 2007, or one could view the $90 level as major support because of the double bottom formed around the beginning of 2008. Looking at the chart, one could make a case for major levels at every $10 mark on the way down to $60.

Either way, crude oil has fallen off a cliff in the past couple of months, and there will be a bounce. That is not a guess, nor a prediction, it is a stone-cold fact. Easing into the long side anywhere below $100, or better yet, $90, could pay off large.

Even more intriguing than the technical side is the fundamental side.

We rely on this resource – scratch that, we are slaves to this resource – and will not be weaned anytime soon. Granted, there are “green” actions taking place in an effort to become less reliant, but hardly enough to keep pace with the world’s increasing population and the explosive industrialization of former second-world countries (i.e. China, Russia, and India). Unless someone finds a new way to run the 750 million passenger cars that exist in the world today, we need oil.

Let’s not forget one of the basic issues that fuels (no pun intended) the price of oil.

Production.

By production, I am referring to the process of getting a barrel of oil to see daylight. In other words, finding the oil, building the rig or other mechanism(s), and lifting the oil from the ground. Production costs for offshore drilling in the United States currently run at about $70 per barrel. Granted, the Middle East pulls it off for $10-$15 per barrel, dragging the world average to just over $30 per barrel.

Realistically, if oil ever approached the offshore US production cost of $70, it would no longer be economically sound to continue production. If the US stopped this production, supply would diminish, and with a lower supply, the cost of oil would increase anyway.

Besides, it is doubtful that anyone producing this commodity is looking to give the world a discount at their own expense. The price will always be as high as the market is willing to bear.

Why not buy oil companies instead?

Good question. Why not buy a company whose profits depend directly on oil prices? Wouldn’t you inherently be taking a position in oil? Wouldn’t that be better, since the company (usually) at least pays dividends?

I’ll be blunt: with this investment idea, I am thinking about oil. I’m not thinking about financial health of companies. I’m not thinking about profits, cash flow, or dividends. Stocks can be dragged down by the general market, but oil is its own animal. It doesn’t care whether some financial giant made earnings or not – stocks listen to oil, not the other way around.

That being said, I am looking to start building a position in oil anywhere below $100.

“I’d rather get a better price.”

Me too. I’d rather buy it for $3.50 per barrel. I can’t. And if you can’t be with the price you love, love the one you’re with. During oil’s most recent run earlier this year (from $90 to $147.35), going by pennies, there were exactly 5,736 different prices. There was a perfect buy and sell amongst them. If you picked them out, send me an e-mail and we’ll skip all this bull and head to Vegas.

I would rather get in on an opportunity, make money, and have missed a few dollars profit than miss the chance altogether because I’ve waited for the perfect price.

There’s just too much in your favor on the long side

At the bare bones of the issue is the glaring truth that there is a finite amount of oil, and we’re using it up. As each barrel is emptied, what’s left becomes more valuable.

Better yet, oil is sensitive to the instability of the world in general. Instability breeds worry. Worry drops stock prices, but it can supercharge commodity prices.

What you have to ask yourself is this, “do I think, at any point in the reasonably near future, the price of oil could rise above $100 per barrel?” If your answer is yes, then lo and behold we are entering a nice place to get involved in ownership.

My answer, my guess, and my contention is “yes”.

John K. Whitehall
Analyst, Oxbury Research