Who Is To Blame For Higher Prices At The Pumps?
Tuesday, July 29th, 2008 Subscribe To Our Feed
Sick of getting hammered gas tank thanks to crazy high gas prices? Me too! The current price of oil is in every newspaper with headlines screaming about the latest record in oil prices. And worst of all, according to the headlines, this is just the tip of the iceberg. How much will it cost you to filler up then?
So who is to blame? Lets look at why you are having to pay more at the pumps.
The oil price shell game is wrecking the lives of millions of people. Is the pressure in Middle East to blame? Is it Big Oil companies who are laughing at your expense while your budget runs on empty? So who do we have to show gratitude for these dramatic price swings? Is it due to a battle between traders going long or short on oil futures contracts at Big Banks? Is it all connected to the Alberta Oil Sands?
The most often heard reason provided is that there has been an increase in the demand for gas thanks to China and India’s explosive growth. Countries that produce oil justcan’t keep up . Even Saudi Arabia recently announced that it was increasing supply to counter demand, and the market yawned.
Is an ounce of truth to this argument? For sure. Is it the Absolutely not.
The economies of China and India during the last 6 years which has lead to an increased demand for oil. The truth is, the US accounts for about 4% of the world’s population, and 25% of the world’s consumption of oil. Still, that’s not the only explanation for oil’s price historic increase.
The demand for oil however hasn’t increased by 100% like the price of oil has over the last 12 months. What’s wrong with this picture?
For for over a generation, the US dollar has influenced the price of commodities. A strong US dollar usually meant lower gold and oil prices. The dramatic weakness of the US dollar has lead to commodities hitting unprecedented all time highs. Commodities are priced in US dollars and move to balance changes in value of the US dollar.
A lower US currency has resulted in both gold and oil shifting 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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