What is a fair oil price?But first, a story:
Mark Twain, perhaps quoting Benjamin Disraeli, said: "There are three kinds of lies: Lies, damn lies, and statistics." We no longer understand the original meaning of the word statistics. In the 1800s, "statistics" were economic numbers produced by the "state." They were (and are) inherently untrustworthy. For instance, the most recent month's Producer Price Index in the US showed a 3.6% decrease in the price of gasoline, while AAA showed a 6% increase for the month. The feds used "seasonal adjustments" to come up with their number.
Another statistical lie is that inflation is running at a 3.5% rate in the US. Two of theore common non-governmental ways of measuring inflation, over very long periods of time, are the price of a can of Campbell's Tomato Soup, and the price of first class postage. I see that a postal rate increase takes effect this July, once again. The new rate of 73 cents will be 10.6% higher than one year prior. The inflation rate is 3.5%?? Nobody who actually buys things believes that.
The point of the above is to show that pricing oil in dollars, when dollars are rapidly depreciating (which is what inflation is: the depreciation of currency) leads to all sorts of errors; especially if one believes the government statistics. It makes things clearer if one prices oil, a commodity, against other commodities.
Last week, China stepped in and banned trading in gold ETFs. Why? The price of the ETFs had surged 30% above their underlying gold holdings. Why? Not sure, but it seems likely investors turned there after not being able to procure physical gold. Regardless, Chinese citizenry, and there are a bunch of them, were paying over $3,000 an ounce for paper gold last week. I see that the big banks have come up with their year end gold prices (see zero hedge article), and a midpoint is roughly $3200.
There is a historical relationship between oil and gold. Midpoint is about 16 to 1, with a range of 10-30 to 1. Since China is also a major oil importer, the oil-gold relationship is probably important. Chinese public buying gold at $3200 would seem to indicate that we are heading for a fair value for oil at $200 a barrel, with bottom price of about $105, and a high-end price of about $320.
One can also price oil in other commodities. Natural gas, relative to oil, is currently quite cheap. A bunch of completed but not connected oil wells were turned on last week, and their associated gas flows flows pushed the price of their gas to minus $2; they had to pay to get someone to take it. At some point, I will probably find it worthwhile to switch the oil stocks for natgas stocks, but I suspect that is 1-5 years from now.
Raw cacao was $2,000 a ton not too long ago; it is now approaching $11,000 a ton. Oil is cheap in pounds of chocolate (or, is chocolate too expensive??)
Here's another way to think: gold represents stored wealth, but oil (and energy in general) is required to make your wealth. Think of oil as kinetic energy and gold as potential energy. One of the ways of valuing gold is by figuring out how much energy is required to mine and refine it, and then pricing gold as if it represented stored energy.
I see that the Biden administration is raising lease rates for oil on federal lands from $10,00 to $150,000, and the royalty rate from 12.5% to 16.7%. Even in non-inflation-adjusted terms, this will certainly drive oil higher.
Bottom line: I believe pricing oil in dollars is not how we should be thinking. Governments always lie about every economic measure and number, and they always have. Start pricing oil, a tangible thing, as a relationship with other tangible things and it is my opinion that you will do better in the long run.
PS: The current oil pricing situation is like the tide coming in. Over the next 6 hours you know the water will be going quite a bit higher, but in the next minute the water may be higher or lower depending on waves. Jesse Livermore was considered one of the greatest market traders of all time, yet he died a broken alcoholic, by his own hand, bankrupt. Investing works, trading is just asking for trouble. Keep a 5 year horizon for your investments. My opinion, I'm sure you have your own.