The world was supposed to end. The oil companies were all in cahoots. Oil prices only go one way, right? Well it didn’t work out that way.
Oil prices have fallen almost 20%. This implies that gas prices should fall to about $3.50 a gallon and heating oil to about $4. While that’s still above where they were last winter, it’s hardly the Energy Armageddon that many feared.
Why did oil come tumbling down? Inventories. When something’s priced too high, too much is produced and not enough is consumed–so inventories go up. The last couple of reports show inventories growing more than expected.
Now over the next couple of weeks market gurus will fret and fuss over whether lower oil prices are a good thing. After all, if they’re a sign that the economy is failing, that might be bad. Don’t worry. Lower oil prices are good. More money to consumers and lower energy prices are here just in time for winter.
The world has a funny way of not ending. Seeing oil prices come off their unsustainable highs just reinforces this truth.
Douglas R. Tengdin, CFA
Chief Investment Officer
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