Gas Price Limbo: How Low Can They Go?

by Lear Capital EditorialJanuary 13, 2015

Energy markets continue to be roiled, with oil plunging below $50 a barrel.

It is hard not to cheer when pulling up to the gas station these days. Ecstatic selfies at gas pumps are flooding social media. But there is an international game of economic chicken going on that could mean real danger for you, if your portfolio is not well-balanced.

What is the game? Well, the United States had been getting closer and closer to energy independence with the shale oil boom and the growing fracking revolution. This has not been sitting well with OPEC and especially Saudi Arabia, who are watching this all very closely. Oil IS their economy. It’s a great economy, and they are thinking long-term here. They can ride out low oil prices and endure some short term pain, even severe short term pain, if in the long run, the glut, the oversupply of oil keeps the price low enough, long enough that the US energy sector is left in shambles. The more reductions and bankruptcies in US energy, the better it will be towards securing OPEC’s dominance for the long haul. This is best accomplished through keeping the price of oil low and keeping the supply high.

There has been much international pressure on OPEC to cut production until the oversupply clears and the price heads back north again. They will not do it, and they will not raise their prices. Well, not for the US anyway. Asia, yes. They have curiously raised their price on exports to Asia. But for the US consumer, it’s a gift that looks like it will keep on giving for the foreseeable future.

How low can they go? According to statements, they are prepared to go to $20 a barrel if that is what it takes to shake off US competition. And that spells a rough ride ahead for the energy sector in the United States.

But before we get too smug about someone sticking it to Big Oil, we should remember who Big Oil is, exactly.

If you own any sort of retirement account these days, chances are, Big Oil is you.

Roughly 97% of oil stocks are held in pensions, IRAs, mutual funds and other types of investment instruments related to retirement savings. With the returns they have had for the past few years, it would be surprising if you did NOT own energy.

These rumblings in the oil markets and the talk coming out of the Saudis are signals that this slump is probably here to stay. It is hard to see how US energy would bounce back unless they think of something quick!

Up until a few months ago, energy was seen as carrying this economy. But now we see that it is maybe not going to be as reliable as we once thought.

Gold is up these days largely through safe haven buying. Of course, we at Lear Capital think these buyers are on to something. I encourage you to look into the peace of mind gold can give in a tumultuous market like this one. Gold can be great insurance for the long haul against shenanigans in other sectors like we are witnessing today. Call one of our specialists and get started today.

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