I was curious to figure how $200 could be a reasonable price target for oil.

http://www.marketoracle.co.uk/Article4779.html

Guns and butter is a term given to our society when we went off the gold standard during times of war to be able to increase the money supply and not have the constraints of a money system backed by gold.

Lately , we have heard of $200 oil price targets over the next 1-2 years. This is probably a conservative estimate if present conditions stay constant.

Assuming the Saudis do not oblige our request, speculators keep speculating, and geo-political risks remain constant then there are only two other factors to consider.

World consumption increases, (which is running about 1.5% - 2% a year,) and the increase in the money supply.

I’m not a mathematician so my calculations may be off. I figure plus or minus 5%.

Since 1982 the money supply of U.S. dollars has increased about 240%.

1982 - 1992 M3 incresed by 8% a year/ 92-02- 12%/ 02-06- 15%/ 06-present 17% a year.

In the last ten years oil has increased about 638%.

Assuming the speculators and geopolitical risk account for about $20 in the price of oil, which is conservative by most estimates, the consumption growth and the increase of M3 should account for roughly a 58% increase in the price of oil.

This would translate into $178 oil prices by the end of this year and that is assuming $20 is a fair price for speculation and geo-political risk.

If the U.S. is truly in a growth recession, where by we do not fall into a deep recession and or depression, it is safe to assume that oil could reach $200 by the end of this year. Mind you this is without supply disruptions and the peak oil problem.

The big question is whether the U.S. and its screwed up system of currency inflation will cause a serious recession or depression in the coming quarters. If the Feds magic tricks end up preventing a catastrophe, (which they created,) then $200 oil may be an easy mark to hit before the year is out.

Unless the government mandates the reduction of leverage on oil futures, we are most certainly heading for $200 oil along with a global recession to boot there after.

At this point, this is probably the only thing we can do in our power besides releasing all of the strategic oil reserves to the market place.

So for now, any pullback in oil should be extemely ephemeral and should be an opportunity to bank coin on your favorite oil and gas stocks. I’ll just stick it out with USO and UNG to avoid mangement and earnings mishaps.

Of course, with this type of mania occuring the oil and gas drillers (FTK) should do very well for quite some time.

Shorting DUG would not be unreasonable either. However if we break support in the market, 1383 S&P, then going long dug for a short term trade is the move. Personally I’m not mucking around with DUG. It is a very tough trade.

On the other hand considering these two articles, and all the problems going on in our economy we really should see some sort of selloff, but of course the momentum is to the upside. Generally after Memorial Day oil and gasoline takes a breather so wait and see what happens next week to make your decisions.

http://www.reason.com/news/show/125414.html

http://www.businessweek.com/lifestyle/content/apr2008/bw2008041_945564.htm

Also, don’t forget RTK which I and the Fly have mentioned over the last week. Alt energy is here for good folks.

GLT

by Green Writer