Where is the Price of Oil Going?
US Shale vs Saudi Sand?
For Christmas I asked Santa to get me a crystal ball. He rarely disappoints. Hopefully after reading this post you will have some insight into my thoughts and the future direction of oil prices.
Commodity prices in general have been declining for years. According to the Rogers International Commodity Index, the commodity super-cycle peaked in Jun 2008. While it is still possible that we could break those all time highs, it is highly unlikely given the deflationary forces at play in the global markets. If you have been reading the inflation monitor for a number of months you know which side of the inflation-deflation fence I sit on. The future of commodity prices will most likely continue on the path that they are currently on. There does not seem to be inflation on the horizon of commodity prices.
Investing in a commodity is a difficult task since it produces no cash flow. So how do you price a commodity? Many smart investors have raised this point before. You cannot say what is the correct price of a commodity unless you have a free market determining the price based on supply and demand. This is basic Economic 101. While reality should be driven by data and facts, in some cases it isn’t. One of these cases in Oil.
Oil the “Political Commodity”
Oil is what I would call a political commodity. What this means is…