PREDICTING THE PRICE OF OIL.

What Factors Influence The Price Of Oil. Bill O'Reilly thinks it's "those greedy oil company executives." He also figures speculators drive prices up and he thinks we should control those markets. If you are waiting for me to give you a definitive answer, you might as well stop reading now. Oil prices are set daily via a complex set of factors including relative valuations of currencies, the futures markets, money flows into hedge funds, geological factors, expectations for conflicts in the middle east, inventory numbers, consumer spending patterns, and dozens of other things I no-doubt missed. Many of the so-called experts use the simple technique of estimating that the current trend will continue. This is probably the reason that you hear talks of $25 per barrel oil. While price maximums and minimums are usually higher than I anticipate, I can not envision oil at prices much lower than the current levels. In fact, I would go so far as to call the current price in the high 30's is as unsustainable on the low end as 147 was on the high end.

Why Prices Will Rise. 1. At these prices, many conservation efforts are not economically viable. For example, one of the more efficient hybrids could be expected to recover the extra cost in three years at $4.00 per gallon gasoline. With the current prices, it would take around 8 years. There was a waiting list for a new Prius last spring and dealers were selling them for a premium over the sticker price. Now dealers have lots full of them. 2. Drilling plans to exploit new deep reservoirs are on hold. As I mentioned countless times before, low-cost producers can undercut the price of new, more difficult to access, production. We need $65+ prices for this production to be profitable. 3. Alternative energy sources are way too expensive to compete. While we love to talk about a wide variety of alternative sources as a solution to this problem, they are even more economically out of line with petroleum than before. Some venture capital firms are still willing to fund new alternative energy technology projects but these are becoming more scarce in the current environment. Even the old windmill man, T Boone Pickens has put his wind/natural gas projects on hold.

How Do We Protect Ourselves Against Future Price Increases. There are a number of ways and I'll tell you about two that I am currently using. 1. US Oil (USO) This is a fund that is constructed to follow the price of west Texas intermediate crude. It is an exchange traded fund that uses futures contracts and other instruments to accomplish its objective. It is a pure oil play and has nothing to do with the performance of any company. I bought it at $29.80 per share. As usual, I hedged my bet by selling an option to buy me out at $30 per share between now and the mid January expiration date. I received $2.24 per share for these options making my net buy in price at $27.56 per share. If the price goes up by a modest $.20 per share, I make almost 9% return for a two week investment. If not, I sell another call for the next month. As with PLD, I pledge to tell you what happens to this investment at the conclusion. Another way to profit from an increase in oil shares is to purchase an oil company with ample reserves. I bought Marathon Oil at $28.69 last October. That was before the recent major drop in oil prices. The stock is currently selling at 26.61. This may not sound like a great deal; however, I have collected $5.85 in option premiums lowering my break even price to $22.84. There are numerous other oil companies that may be worth buying at current prices. The currently high option premiums provide a decent means of downside protection and higher returns in the current market. As usual, I hasten to add that these examples are for illustrative purposes only. Do not consider them as recommended strategies for your own portfolio.

My Last Post Of 2008. A new year starts day after tomorrow. I have no particular plans to change my money management strategies for next year. I do anticipate a much better market and will begin the long process of rebuilding my own and my client's portfolios. Many of you will be getting statements that show some pretty hefty losses. We harvested these losses in taxable accounts only in order to provide deductions for current and future years. Our strategy was to replace these depreciated shares with similar companies at depressed prices. Also, we can wait 30 days and replace these same shares with new shares of the same company. Here's hoping that next year brings more prosperity to us all.