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July 2008 - Sick of getting hammered each time you
fill your take with crazy high gas prices? Me too! The price of oil is in every
newspaper with headlines screaming about the latest record in oil prices. And
most worrisome of all, according to the headlines, this is just the beginning.
How much will it cost you to fill your tank up then? So who is to blame? Lets
examine some of the reasons why you are getting the raw end of the deal and
having to pay more at the pumps.
This oil price shell game is wrecking the lives of millions of people. Is the
pressure in Middle East at fault? Is it Big Oil companies who are laughing all
the way to the bank while your budget runs on empty? So who do we have to thank
for these wild price swings? Is it due to a battle between traders going short
or long on oil futures contracts at Big Banks? Is it all connected to the
Alberta Oil Sands?
The most often heard explanation is that there
has been an increase in the demand for gas thanks to
China and India’s explosive growth. Countries that
produce oil just can’t keep up with demand. Saudi
Arabia announced recently that it was increasing
supply to counter demand, and the market yawned.
Is there any truth to this argument? For sure. Is
it the Absolutely not.
The economies of China and India during the last
4 years which has lead to an increased demand for
oil. The truth is, the US accounts for about 5% of
the world’s population, and 25% of the world’s
consumption of oil. Still, that’s not the real
rationale for oil’s price historic increase.
The demand for oil although hasn’t increased by
100% like the price of oil has over the last 10
months. What’s wrong with this picture?
For decades, the US dollar has influenced the
price of commodities. A strong US dollar often meant
lower oil and gold prices. The incredible drop in
the price of the US dollar has lead to commodities
hitting new all time highs. Commodities are priced
in US dollars and move to compensate for changes in
value of the US dollar.
A lower US dollar has resulted in both oil and
gold moving up in price, resulting in you getting
burnt at the pumps. Since September 2007, Fed
Chairman Ben Bernanke has cut interest rates 7
times, with the largest cuts occurring in 2008.
During that same timeframe, the price of oil has
moved from $69.26 in September 2007 to $110 in April
2008 when the last cut was made. Today, oil is
around $130 a barrel.
This provides an explosive mix for drivers. Hard
working Americans are paying the price at the pumps
for a devalued dollar thanks to Mr Bernanke. Lower
interest rates were meant to help the banks in light
of the housing crisis. Instead, it helped to lower
the value of the US dollar and by effect, increasing
the price at the pumps.
I hate to say this, but, traders, especially the
large commodity and futures are fueling the
commodity bubble. Like with any bubble, emotions
take over. “Its different this time”. If history has
taught us anything, its that its never different
this time. They continue to feed the perception of
that demand for oil will force the price of oil over
$200, and they don’t want to miss the boat.
So what can you do about it. Let’s get the ball
rolling.
Since you know
how the stock market works, lets get onto what
you as a trader can do. As a trader, you have a
couple of ways you can play this:
First things first, take a step back away from
all the noise you’ll hear about supply, demand,
interest rates, inflation, commodities bubbles and
Ben Bernanke. Emotions are the biggest risk to your
portfolio.
Second, look at the facts.
Yes, demand for oil is higher than supply, and
will continue to be so. There is only so much oil in
the world, and even if a new discovery is found, it
will take years before you and I see it at the
pumps.
What goes up must come down. Will oil hit $50 a
barrel in the next few years? Don’t hold your
breath.
Inflation is on the rise, thanks in large part to
the price of oil. Higher oil prices means higher
costs for transportation, travel and manufacturing
of various products. This impacts you the consumer.
The answer will be in an interest rate hike which
will likely occur in August and again in October.
Bottom line: What does that mean for you? Use
these
stock trading strategies as your ace in the
hole.
1. Get to know how to trade ETF’s so that you can
go long and short to take advantage of the trend
changes in the price of oil and the price of gold.
2. Watch the trend very carefully. When it
changes, be prepared to buy the appropriate ETF
3. Set your stop loses. Only a poor trader
ignores the use of a stop loss. These are volitile
markets and you could see a large portion of your
trading capital wiped out quickly without a stop.
4. Understand that markets do not trade in either
direction forever. The trend is your friend. Follow
it, and you will prosper.
5. An increase in interest rates may be bad news
for the markets which will interpret it as leading
to a slowing down of growth - leading to a
recession. On the other hand, a drop in the price of
oil may also be cheered by the markets. Look for the
major indexes to trade sideways for a bit.
Keep your eyes open for the signs to see how this
will play out. When the Fed raises interest rates,
the price of oil will fall like a house of cards,
and you’ll be the one laughing all the way to the
bank
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