Blog : Oil Prices and Penny Stocks

by Peter Leeds on December 11th, 2012

There are a lot of penny stocks affected by oil prices. So, let's take a look at oil prices.

Have you taken a look at a historical trading chart for oil lately?

Oil traded at $20 per barrel in 2002.

$30 in 2003.

$40 in 2004.

$50 in 2005.

$60 in 2006...

... and now up to $86 in 2012, with spikes as high as $110.

Ignoring expected volatility, there is some underlying strength in oil demand. There is also proportionate strength in oil production penny stocks.

There is a price premium factored into oil prices, due to the tensions in the Middle East, as well as supply fears and peak oil concerns.  Any excessive demand will be good news for oil production penny stocks.  In fact, playing penny stocks based on oil prices alone can be a good strategy.

In people's commotion, fueled by global uncertainty, everyone has seemed to forget that oil is the second most common liquid on the earth, second only to water.

What about the crisis in the middle east?  Well, the 'crisis' is already factored into oil prices.  As such, it affected oil prices, and thus penny stocks involved in production.

What about uncertainty and sabotage in Iraq? Bahrain?  Already factored in.

What about hurricanes, national upheaval, terrorism disrupting supply pipelines...? Factored in, factored in, factored in.

In my calculations, there is a $20 price premium on oil right now, due to military actions, political uncertainty, and supply disruption.  Long term I expect even higher oil prices and share prices for many related penny stocks.  However, in the medium term, I personally do not expect prices to rise dramatically from current levels.

Why else would the price of oil barely increase at all, upon the IRD (Israeli Defense Forces) engaging in military action with Lebanon? I mean, listen to that out loud. The IRD engaged Lebanon, or Lebanon engaged Israel depending how you look at the situation, which should drive oil prices up in concert with the uncertainty and instability, but it barely had an effect!

Prices did not increase because they are already way over-extended. The price premium is far too high right now, and thus they can't go much higher.  Oil penny stocks can always increased by improving their operational results, as can oil service penny stocks.  However, upside effects from oil cost momentum may be muted among oil penny stocks and oil service penny stocks.

As for supply disruptions, the world's largest oil producer, and indeed the vast majority of oil producing nations, have no supply concerns whatsoever. (Russia is the world's biggest oil producer currently.)

What does a big drop in oil prices have to do with penny stocks? I'll let you figure that out. Or you can go to the professionals at PeterLeeds.com and subscribe to Peter Leeds Penny Stocks newsletter to take advantage of some of the latest trends, insights, and picks.

Besides all the other reasons I have mentioned in making a case for a drop in oil prices, I have yet to mention the biggest reason.

Think of the laws of nature. One thing that guarantees a decrease in the population of an animal group is a lack of food. If there are 5 rabbits and 70 foxes, you are going to see a major drop off in the number of foxes. They will starve.

The current oil prices, even those prices two years ago, have been lucrative enough to put even the most marginal oil wells into full production. Producers are pumping water into the ground to eek out the last few drops. Most wells used to leave as much as 70% of the oil in the ground, because it was more troublesome after the first 30% and not worth the cost to get the rest. Guess what? They are now going back in for it.

Technological advancements have also made it easier and more efficient to find and extract crude. I mean, look at the Canadian Oil Sands. The oil is literally sitting on the surface of the ground. You can reach down and pick it up in your hand. So what if you need to move 10 tons of dirt to get 1 ton of oil? At $85 a barrel it suddenly became a profitable venture. At $110, well hey - look at the dozen major oil production companies that are starting up operations in the oil sands.

Canada has more oil than any other nation in the world, save Saudi Arabia. Yet the media makes you believe there is a global supply crisis? Just drive north, you can pick it up with your hands.