Insights & Advice

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Oil hits my price target

Oil--Take Profits

If there is one thing I’ve learned in forecasting commodity prices, you have to be disciplined. Here in the U.S. our benchmark crude for April delivery hit an overnight high of $103.41 in electronic trading. It’s time to sell.

One hundred dollar oil has been my target now for well over a year. It is an interim price target because I still believe that over the long term (over the next few years) we will see the price of oil much higher. But for now this rally is on its last legs.

‘How can you say that?” demanded one client who just recently jumped on the oil bandwagon.
“Don’t you read the news? The Middle East is coming apart. The world’s oil supplies are in jeopardy.”

That is the kind of sentiment that makes me feel even more confident that it is time to take profits. Sure, there are pressing issues over in oil land and I don’t deny that there will be additional turmoil before all is said and done. However, I do not believe that the world’s oil supply is in jeopardy.

Keep in mind that Libya produces less than 2% of the world’s oil. Its “King of Kings” (as Muammar Gaddafi likes to be called these days), is in my opinion, a certifiable madman and his ultimate demise would be cause to celebrate. However, that may take some time to engineer and in the meantime oil will most likely stay at these nose-bleed levels. Ultimately, when the crisis has passed, we will once again be back to a global economy that is growing slowly and definitely not at a pace that justifies such high price levels for energy.

This temporary spike in oil is great news for the media. It has spawned an entirely new “what if” series of gloom and doom economic scenarios, which in turn has driven the stock markets down 3%.

“Auto sales will be decimated,” says one talking head.

“Four dollar gas is round the corner,” predicts a young gas station attendant solemnly.

“The economy will be thrown back into a recession,” says an economist, still smarting from his conviction that we would experience a double dip recession in 2010.

“The consumer will be crushed.”

“Restaurants will close.”

“It’s the end of the world.” (My quote).

Those kinds of statements will certainly sell newspapers or keep you tuned into CNBC, but beyond their entertainment value I see no point in listening to these Doctor Dooms.

Folks, my advice is to keep this present state of affairs in perspective. We were badly in need of a market correction. Now, we have it, thanks to the Middle East. A month from now when this blows over and the price of oil is considerably lower than today you will be wishing you did two things: 1) took advantage of lower stock prices and 2) sold oil, if you owned it.

Posted in A Few Dollars More, Portfolio Advice