If you have read Investment Fables by Damodaran, you realise how for every situation (as it exists) a story is created. For e.g we have heard the following – have we not?
Most of the world’s major oil deposits have already been discovered. China and India are consuming far too much of energy – far beyond what Bush would like them to.
The easy discoveries have already been made. Politically India and China are protecting their end users with an element of subsidy – or inflation will kill them
Meanwhile, the world’s demand for oil keeps rising as more people around the globe – set up factories, buy cars, take flights, upgrade to bigger cars, etc.
Then the political mess. Iraq. Russia. And Nigeria. None of them is a democracy – so it is possible that Bush might decide to teach them how to live in a democracy and respect their women folk, so what if kids in his own country walk around with guns! That means even less oil, or higher prices.
No wonder oil is trading near $120 a barrel.
This is the story. But it’s important to understand that it is only that, a story. It tells you that there is a cause and effect – after the effect has happened. If tomorrow is going to be like today, you should put all your money in oil, correct? That might hurt. It is a commodity and it will fluctuate. Will it see 100 again? what about 80? No clue.
So far the futures market still has more buyers on the call side and not too many on the put side! Oil is up roughly 25% this year and prices have almost doubled since the start of 2007.
And who can say? Maybe oil will trend higher. Perhaps much higher, especially if we see a major supply disruption. Will oil reach $ 200 a barrel? What about $ 400
Right now the bulls are having their way. But it would be foolish to believe there are no worries on the horizon. After all Alan Greenspan thought subprime was not a problem till recently. Chief among these is that you keep hearing “the story.”
You know the stories. “The internet changes everything.” “They’re not making any more real estate.” “Oil has nowhere to go but up.” And the worst of all as John Templeton says “this time it is different”
Oil at 200 might make milk a good alternative and at $ 400 maybe you could melt some gold and put it in your tank!!
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