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Oils Well That Ends Well

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I've been really surprised that the Dow Jones industrial average continues to drop. The last time it dropped to 8,200 I thought it would be the last chance at those prices. As I write this, the mark is at 7,500 and some indications seem to say that it could go even lower. Despite that, we've been buying some index funds with our Zecco account. Specifically we've been picking up Vanguard Total Index (VTI) and Vanguard All-World Ex-US (VEU).

However, one of my worst investments seems to have been PowerShares DB Oil Fund (DBO) which generally moves with oil prices. If you've been following gas prices you've seen the drop they've taken lately. What did I see in DBO that interested me? I remember that a barrel of oil was around $150 this summer towards it's peak. Recently with it $60-65 it seemed like a tremendous bargain. Consider this 6 month chart of DBO:

Here is where I made my mistake. I didn't look at the big picture. If I had, I might have remembered that $150 was due to speculation. I might have looked at this 20-month chart:

The chart might be a little small (you can play with a full version here), but if you Rip Van Winkle'd 2008, the price of DBO might seem in line with 2007.

The price of oil just broke below $50 and some are saying that it get as low as $30. If it gets below $40, I may have to dollar cost average and pick up some more of DBO. I can't help but feel that at some point in the next 3 or 4 years we'll see $100 oil again.

What are your thoughts?

Last updated on July 29, 2011.

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19 Responses to “Oils Well That Ends Well”

  1. Now that oil has proven itself to be highly volatile commodity, I would move out of an oil specific fund and into a broader commodity ETF/fund and/or energy ETF/fund. Speculation by so-called experts about crude oil prices is now as reliable as speculation about gold prices.

  2. Lazy Man says:

    I still like oil a lot more than gold. The world has a massive need for oil. If gold disappeared, we’d lose a fantastic conductor of electricity, but I don’t think the world would come to a grinding halt.

  3. We’ll see $250 oil. Just wait until this semi-depression is over and the BRIC countries ramp up again.

  4. ChristianPF says:

    I am with you with grabbing up some index fund shares… The market has taken an astronomical dive and I want to take advantage of the ride back up.

  5. Marc Goodin says:

    Right now i say buy almost anything for the long term. Oil, gold and dividend stocks for sure will be up 25% over the next year.

  6. Ryuko says:

    Here’s my speculation:
    Oil is down because demand is down. Fact is, Americans are still the primary buyers, and we cannot afford to pay more than $5 a gallon, so we’re hitching rides, carpooling, and taking the subway more often. Many people I know have already switched to those 10hr/day, 4-day/wk work schedules to save gas. Add in the credit crunch that accompanied the housing bubble stupidity, and that is why gas didn’t go up any higher. The trouble w/ the Big 3 and increase in percentage of high-efficiency foreign cars is also helping things out. My opinion is that this chain effect will help make prices all over the nation go down somewhat, which will help those of us who still have jobs to start pouring more money back into the economy. For now.
    Now that we’re in a recession, prices will drop until people are comfortable, and then things will start to go up again.

    Thing is, we got caught with our pants down in our love affair w/ oil. It spiked, and I don’t think anyone wants to see that again – therefore, I see a huge push in the next few years for alternative energy and energy conservancy. However, fact remains that 1) supplies are limited and peak oil has been reached 2) many major 3rd-world countries will continue to increase their demand for oil over the next couple decades and 3) new technologies will take at least a decade to become commonplace (probably longer). $200 a barrel oil is coming, and it will hurt. But it’s not going to be the Great Depression all over again, unless something else really big happens.

    Remember what cause the Great Depression? It wasn’t just wall-street collapsing. Europe was already in recession from WWI. Germany and it’s allies were devastated. China was defeated and the Japanese were roaming the Pacific and fighting an expensive war with Russia. Outside the US, the rest of the world was in no shape to handle a major economic hiccup like Black Tuesday. No, we will need a much more dramatic event to trigger such a depression. It will probably happen, but there is not yet any way to know what it will be.

  7. ike says:

    bought uso when oil was near 60.will add as needed under that and wait for oil at 80 which is still half of bubble high.Summer driving we will get 3 dollar a gallon again and be happy it isn’t 4.No drill baby drill here just slowing and light move to alternatives.

  8. Jeff says:

    Oil is a boom and bust business. It always has been and always will be. Its gone down 60 percent from its highs twice in the last 20 years. Oil prices revert to the mean, and so do stock returns. Oil prices are not linear. When supplies go down, relative to demand, prices go up. Then exploration and production increase. Then supply overshoots demand and prices crash, like now. Production and demand are never in balance with oil. Its a cycle that will repeat itslef over and over again. The best cure for high prices are high prices. And thats never more true than in oil. The low dollar contributed to the high prices and speculation. And even now supplies of oil and natural gas are increasing as demand decreases. Anyone who believed high oil prices were going to continue, without abatement, is a fool.

  9. appfunds says:

    I`d take some oil instead of worthless greenbacks. That`s another bubble to burst – I mean the dollar.

  10. DoubleOurMoney says:

    If you want to stay in oil then you dollar cost average and buy more shares, if you want to be prudent then you get out at a predetermined stop loss and wait for a trend up before getting back in.

  11. Lazy Man says:

    I don’t know why it’s prudent to get out at a predetermined stop loss with regard to oil. I don’t think there’s a fear that it’s ever going to go to zero. Barrels of oil aren’t going out of business.

  12. The Slacker says:

    I agree with you Lazy Man, I think this is a good time to get into oil. Futures are already starting to jump due to expectations of a supply decrease.

    I like the concept of your blog, check out my blog when you get a chance.


  13. ike says:

    updating My comments bought more USO and it has started up though profit taking will set in.Range no problem but I did get outtimed on KOL as coal tailspun then rebounded.It is now very depressed and I will reenter soon but I know Coal is NOT Oil.

  14. Manshu says:

    I think oil is going to touch 100 bucks, but not in the near future. I just don’t see the same kind of speculation in it, that happened earlier.

  15. Mike says:

    Once it gets to $40 oil is a good buy. It probably should be priced between $60 and $80 except when the entire world is in a deep recession, but still a little too high to invest right now.

  16. dannygutters says:

    Are you kidding, your entire basis for buying that oil fund was to look at a historical price from 6 months ago? Grahamn is disappointed in you from beyond the grave. There may be a good reason to buy oil at 60 but the previous price of a fund is not it.

  17. Lazy Man says:

    That’s not the only reason. I believe that China and India will be larger consumers of oil in the next 5-10 years. With increasing demand and a diminishing supply (oil isn’t being added to the Earth very fast even if we keep finding it), it seems like a recipe that Graham would approve of.

    I haven’t read a lot of Graham, but it’s worth noting that a commodity that the world needs to function is not like speculating on a single company.

  18. Harry says:

    Americans are still the primary buyers, and we cannot afford to pay more than $5 a gallon, so we’re hitching rides, carpooling, and taking the subway more often. Many people I know have already switched to those 10hr/day, 4-day/wk work schedules to save gas.but I did get out timed on KOL as coal tailspin then rebounded.It is now very depressed and I will reenter soon

  19. Goalhunter says:

    Oil is critical and limited. That’s why it shot up before, but it shot up too fast so it had to peter out at some point. I don’t know what the price to get in is (I’m like you, my stocks nosedived) but there will be a limit. We have enough oil for, I don’t know, 50 or 75 years or something like that at current reserves and production. Every year is going to be a big exponential number. If it’s 50 years, one year is 2%. When it gets to 25, one year is 4%. When it gets to 10, 1 year is 10%.

    There will be incredible inflation on oil in the future; that’s guaranteed. Since people look forward, you can expect these % changes to be amplified.

    Oil is a rock solid investment. Even if you lost half your money you’ll get it back.

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