Why Did Oil Collapse And How Low Will Gas Prices Go?

Finally, oil has gotten crushed!  We haven’t seen this large of a decline in oil in years as momentum speculators rushed out like someone discovering their Match.com date looks nothing like their picture!  One can say that the decline in oil prices was sparked by fears over slower US economic growth, but who are we kidding?  Someone who was long oil panicked, leading to more panic, followed by even more PANIC!!!

Perhaps the initial seller finally read, “Gas Prices Are Out Of Control And People Love It!” and spread it around.  The point of the post was actually to highlight how ridiculously OVERPRICED gas prices are given how much reported supply we have (US$1 million more barrels/day in 2011 vs. 2010).  If someone like me, who has a job and barely drives feels it, why doesn’t the rest of America feel it?  America does, and its hard for fundamentals to justify such levels.

SO WHAT NOW?

Who knows where oil prices will go from here.  Given most speculators are nothing more than momentum investors, you know that many of them who’ve been long oil have lost a lot of money.  What happens when you lose a lot of money all of the sudden?  You become shell shocked and end up doing nothing for a while until momentum returns.

It’s really too early whether the oil bubble has burst or not.  Some analysts predict oil prices will now head to $80, while others think a resumption is not to far in the distant future.  The fact of the mater is, nobody knows.  The trader in me can’t help but look to buy some oil ETFs such as USO or UCO to gain exposure after such a steep 10% fall.  But again, it’s just a hedge in case oil prices do resume their upward trend again.

LOOKING ON THE BRIGHT SIDE

I have to admit, if gas prices do start trending down 40-50 cents in San Francisco (10%), I will be ecstatic even though from a monetary stand point, it doesn’t save much much just as it doesn’t cost me much as a city dweller who takes public transportation.

If someone like me is ecstatic about a 10% decline in gas prices, then I surely hope the rest of America is as well!  A happy consumer is a happy spender.  Let Americans spend their gas savings on everything else to help spur the economy along.  For the record, I think oil/gas prices will be higher than $100 by the end of 2011 as speculators return with better economic figures in the second half.  I’ve sold in May, but I just might have to come back soon!

And now for some brilliant humor by Iman Crosson which highlights the main reason for why the commodity bubble popped. This is classic. Let’s raise them taxes on all Americans to save our budget. Two terms for sure!

Readers, do you think Osama Bin Laden burst the oil bubble? Will your “Consumer Confidence” tick up if gas prices decline by 40-50 cents? Where do you think gas prices are headed for the year?

Does WTI oil go to $110 or to $90 first?

Regards,

Sam

Sam started Financial Samurai in 2009 during the depths of the financial crisis as a way to make sense of chaos. After 13 years working on Wall Street, Sam decided to retire in 2012 to utilize everything he learned in business school to focus on online entrepreneurship.

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Comments

  1. says

    I think the oil speculation was broken by the impact of the silver market and increased margin requirements. The fact that speculation was largely seen as being a major factor in silver leads me to suspect that some of the long players in oil decided to take profits before increased margin spread to that market. Unless you started a position over $100, you still made some money so I don’t know that major players got hurt all that much.

    I would still be concerned about another shock to the financial system that would lead oil to be below $100 by a large margin by the end of the year. I am not convinced that the economy has enough strength to continue growing. Of course, I could be wrong. I wouldn’t mind seeing my gas costs decrease. At the same time, inflation is good for my other investments.

    • says

      Yeah, the silver and margin requirement was a biggie. You don’t think it was Osama Bin Laden popping the bubble from his grave though? If you look at the timing, it’s spot on!

      I’m convinced oil will be above $100 by year end, and closer to $115, hence why I’ve gone long oil ETFs in the pullback last week. Just a trade.

      • says

        Certainly a reasonable trade at that. I read today that the death of Osama was a testament to the might of the US military and specifically the Navy. The country the controls the seas controls trade and hence has a better lock on holding the global reserve currency. The death of Osama was thus good for the dollar and dollar index leading to the decline in oil and gold. An interesting thought to be sure. Be prepared for more volatility this summer.

  2. says

    Really? I think if oil price really collapse, we should put in a gas tax to keep price artificially high. That way, people will be used to the high price and complain less. It’ll also help push alternative renewable energy along.

  3. says

    My favorite thing about these spikes is watching how many analysts play Monday morning quarterback…where were they the day before or the week before the dip? Could have made their bosses a lot of money.

    Whatever happened to that guy who declared Oil would hit $200 by years end 2009?

  4. says

    I think it was supply/demand! Driving decreased due price increases to the point supply finally affected price. Speculation adds to the problem as well. I think it will go down before it goes up. If the price drops by fifty cents, I will save only roughly $32 per month, but more importantly other items that are affected by transportation cost will not increase or possibly decrease. This may have a psychological positive effect, but I think the unemployment percentage is more important! Every week the stock market moves up or down based on the jobs report.

    • says

      You’d THINK it would be logically supply and demand, but speculators, including a retail trader like myself can’t get enough of this crazy volatility and momentum.

      Private sector hiring again is pretty good! Too bad the headline unemployment rate is at 9%.

  5. says

    Im just waiting to see the decline. I know the gas stations need to deplete their higher cost inventory first, and then we have the pick up in gas price for the memorial weekend…but we should start to see relatively lower prices in June!

  6. George says

    The spread in gas prices on Mother’s Day was interesting… downtown Portland had stations selling for $4.20/gal and closer to home (out on the edge of urban growth boundary) was only $3.82/gal.

  7. says

    No idea where oil prices are going. But they’re not finding any more supergiant fields, at least for now.
    Commodity bulls will maintain that long-term gold/oil ratio is reputed to be 15x — but with longish periods in between where it’s way out of whack.

  8. says

    I expect prices to go right back up for Memorial Day!

    I would be thrilled if gas prices dropped since I drive about 2500 miles a month. However, I wouldn’t go on a spending spree or anything, I just buy what I have to and drive where I have to go.

  9. says

    The prices may dip for a while but ultimately will continue to rise. As we decimate this finite resource demand will drive the price upward. Peak oil is close.

  10. says

    I think we’re going to keep seeing these cycles go up and down with oil and gas prices. Who knows how long until we hit “peak” oil, if we haven’t already, but I’m predicting this cycle will only get worse as we get near it.

    Thankfully, I don’t drive much. However, I accepted a summer job that is a good 45 minutes away for one month to gain “experience.” Can’t ride my bike that far and our metro system stinks (I plotted it out and it would take me 2.5 hours by train/bus vs. 45 minutes by car. Crappy to say the least!)

  11. says

    As a Doomer, I clearly expect gas prices to climb. Yesterday, the price dropped to about $1.31/litre, which was fabulous compared to the $1.36 it has been. I commented to my husband that it would not last. This morning, the price was back up to $1.38.

    I’d love to be wrong, but I don’t believe that anything will stop the climb, even if there are temporary drops.

  12. says

    I agree with ^^. Oil and other commodities cycle. So, when I’m done reading my cycles book Ill let you know how far it will fall (sarcasm).

  13. Untemplater says

    I’ve been taking public transit as many places as possible. I don’t drive that often but I do fly several times a year and I’m really hoping airfare will drop soon with the dip in oil. Flights have been crazy expensive this year.

  14. says

    I did notice the oil price went down by $0.06 (from $1.40/L to $1.34) to at the gas stations the other night. And I filled my car up ;)

    That video is fantastic- he does such a good job of imitating Obama!

  15. brian says

    my hummer sits while i drive my 95 toyota that gets 35mpg i dont buy anything but food and pay bills i will not buy anything or go on any vacation until gas prices fall to 2.00 a gallon and stay there for 6 months. been doing this for 2 years now, all my friends and family have joined me. don t buy anything until this stops.

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