Here’s Why Oil and Gas Prices Won’t be this Cheap for Long

The consumer is celebrating the drastic drop in gas prices at the pump. More than six states have reported an average price lower than $3 and prices are still falling. Crude oil slipped below $80 a barrel during trading yesterday, and experts are clamoring for it to head even lower.

The reality is that oil prices could fall as far as the high $60s.

And I’ve never seen a better time to get into oil …

Saudi Arabia is playing a dangerous game of chicken with the other oil producers, but this drop in the price of black gold is temporary, making it a great time to load up on oil-related investments.

The recent plunge in oil prices is due to a glut of supply on the market. Oil supply currently exceeds demand by about 300,000 barrels of oil per day. Not only has output from the United States ramped up, but production has also increased in several other countries around the world. At the same time, Saudi Arabia has kept its production levels incredibly high.

But unlike the United States, Canada, Russia and many other countries, Saudi Arabia can tolerate $80 oil. Saudi Arabia can even stomach $60 … for a while.

In the graphic below provided by Morgan Stanley, you can see the breakeven price for many different sources of oil and the list continues to grow. Production from unconventional sources such as Canadian oil sands and U.S. oil shale, which have breakeven prices on average of $100 and $75 respectively, will ultimately have to shut-in production rather than continue to hemorrhage money.

And that’s exactly what the Saudis want — to price out the marginal competitors.

The Inevitable Rise in Oil Prices

While Saudi Arabia can pull oil out of the ground cheaply, it can’t afford to allow the price to stay low for too long. The social cost of oil demands that the price of black gold stay above $100 per barrel.

Jeff Opdyke, Investment Director for The Sovereign Society, has been discussing this for several years now. In the February 2013 issue of Sovereign Investor, he explained:

More important, however, are the social costs built into OPEC oil. Oppressive Middle Eastern governments use oil revenue to buy the peace, without which regimes all over the region would crumble under the same pressures that toppled governments in Tunisia and Egypt and which are now destroying Syria. By various estimates, the social costs of oil in various countries run from about $70 a barrel up past $120.

If oil prices stay too low for too long, oil-dependent countries such as Iran, Venezuela, Saudi Arabia and even Russia will become rampant with riots, violence, terrorism and ultimately financial collapse — not something their leaders want if they wish to stay in power.

No, it’s not pretty. But it is exactly why the price of oil will be well into the $100 price range this time next year — these countries won’t allow the price of oil to stay low for long.

When Saudi Arabia is done pricing out the competition, oil is going to pop back up to $100 and higher…

Oil Prices: Best Time to Jump in is Now

One of the best opportunities is to grab oil companies that shadow the price of oil — and FMC Technologies (NYSE: FTI) nearly does this perfectly.

FMC Technologies provides technology solutions for the energy sector in various aspects of exploration and production.

The company has a five-year correlation of 0.83 to the price of oil. A one-for-one move would be a perfect correlation, but you will never find that with a stock and commodity. 0.83 is about as close as it gets.

Purchasing this stock is an easy way to ride the oil rebound, although a higher-risk/higher-reward opportunity exists in the options market.

If you want to make this trade, grab the April 2015 $50 strike call for about $4.50. If it were me, I wouldn’t pay more than $5.

Regards,

Chad Shoop
Editor, Pure Income

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