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Do not fool yourself into thinking that you know what the price of a commodity should be.
- Phil Flynn |
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Phil is one of the world's leading energy market analysts, providing individual investors, professional traders and institutions with up-to-the-minute investment and risk management insight into global petroleum, gasoline and energy markets. Phil's market commentary, fundamental and technical analysis, and long-term forecasts are sought by industry executives, investors and media worldwide. Now you can get this highly sought after analysis with your daily research newsletter from Phil Flynn.
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Today's Featured Article
Are you worried about the state of the economy? Are you worried about the possibility of inflation? Perhaps the one way to protect you in this global economic environment is to have exposure to the oil market. Yes that's right the oil market. In fact perhaps oil is as good as gold to act as a hedge against global uncertainty. Maybe even better when you consider the fact that gold isn't really used for anything but jewelry. On the other hand oil not only acts like a currency and a hedge against a falling dollar but at the same time it is a commodity that seems to find a certain level of demand in good times and bad. In fact, to have some exposure
to oil either long or short may be the best hedge against a multitude of possible outcomes as we muddle our way through this financial crisis.
Oh sure, we have heard a lot talk about oil being driven by speculators but the truth is that oil has become a strategic investment against a global economy that has gone mad. Oil went to historic highs as people had a false perception about the depth of the global economic crisis. They bought oil because they thought that little subprime crisis in the United States was a local problem. They bought oil because they thought global production had peaked and we would face the inevitable production decline. Yet they also bought oil as they feared US bank failures and low US interest rates while the rest of the world would go merrily along consuming oil. They bought oil as they feared that
the dollar was not worth the paper it was printed on.
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Of course, shortly thereafter, we had the biggest peak to valley drop in the history of the contract. We soon found out the US was not alone and the rest of the world was in this sinking economic boat. Oil sold off hard reflecting deflationary fears and sinking global demand. Later the market roared back as the market has found some more stable ground.
Oil has better reflected the mood and health of the economy perhaps better than any other commodity. To have your portfolio properly hedged with oil should work against a multiple of possible outcomes.
The truth is that oil has acted as the perfect hedge against fears such as bank failures and in a larger sense the total global collapse of the economic universe as we had known it. Oil acted as a hedge against a falling dollar. Oil acted as a hedge against uncertainty and oil reflected our deepest fears about the world as we know it. Now some may call that speculation. I call it a stark reality.
And now there is a call to reign in speculation. Somehow in the rush to kill the messenger there is this insane belief that if there was not active speculative participation in the market place that price might not have gone as high as they had. Nothing could be further from the truth. The oil market was reflecting not just the normal supply and demand patterns of the last twenty years or so, but reflecting the angst from the greatest financial crisis since the Great Depression. To blame futures speculators for driving the price of oil is like trying to blame a mosquito for causing a hurricane.
The reasons why oil moved the way it did is obvious if you can grasp the magnitude and depth of the financial crisis and the fundamentals surround the market. The oil market functioned correctly and efficiently, providing an outlet that allowed the panic to subside. The market adjusted price to assure a fluidity of supply. At the same time it offered an outlet to those that was looking for a hard asset to diversify them away from a crumbling global economy.
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A perfect example of oil as a hedge was earlier this year when the Federal Reserve moved to quantitative easing. Quantitative easing is basically the Fed printing money to fight deflation... By creating inflation and money out of thin air they changed the trend of the market. The Dollar lost its safe haven status and once again traders looked to oil as an alternative. The Fed's policy of quantitative easing stimulated the economy as good as an interest rate cut. But at the same time, it has the potential to be much more inflationary and dollar bearish. If you print more dollars they are worth less. Oil increased as the dollar fell and is perhaps
more in tune with the move of the dollar than ever before.
If the Fed Moves away from quantitative easing the dollar will rise and oil will fall initially. Yet as the economy recovers oil will increase again as low prices and an improving economy will tighten supplies once again.
During the credit crisis we saw major cut backs in production. Billions of dollars in oil projects were cancelled or put on hold. As the economy improves supplies that are ample now could tightened quickly in the future. Those days may not be too far behind as the US GDP hit 3.5%. The ISM manufacturing data blew away expectations by posting a 55.7% expansion, which was the best since April 2006. The ISM Production index also soared to a five year high as well in a broad based recovery that even transcended the Cash for Clunkers program. That followed some strong numbers out of China as well.
Is it possible that the days of 0% interest rates and quantitative easing is nearing an end? And if it does is your portfolio balanced correctly? It's possible that if you do not have some exposure to oil you may want to rethink your strategy.
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About the Author
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Phil Flynn is one of the world's leading energy market analysts. Phil provides up-to-the-minute investment and risk management insight into global petroleum, gasoline and energy markets. Phil's market commentary, fundamental and technical analysis, and long-term forecasts are sought by industry executives, investors and media worldwide.
Phil and his energy team were one of the first to predict that global crude oil prices would exceed $30/barrel in the year 2000, a correctly predicted market milestone that has highlighted the economic scene in the new millennium. Phil also called the rise of retail gas prices in 2001. Most recently, Phil Flynn has again accurately predicted that global crude oil prices would reach close to $40/barrel ($39.99/barrel) in 2004. Through hundreds of media interviews, Phil Flynn has become familiar names in living rooms and boardrooms worldwide. The world's print, broadcast, online media and small businesses have come to rely on Phil's accurate and animated forecasts, analysis, speculative
and hedging opportunities.
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Special Message from Our Author
Get daily research letters from Phil Flynn
Phil is one of the world's leading energy market analysts, providing individual investors, professional traders and institutions with up-to-the-minute investment and risk management insight into global petroleum, gasoline and energy markets. Phil's market commentary, fundamental and technical analysis, and long-term forecasts are sought by industry executives, investors and media worldwide. Now you can get this highly sought after analysis with your daily research newsletter from Phil Flynn.
Learn more about this complimentary offer and sign-up today. |
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