Friday, December 31, 2010

Crude Oil Unleashed.

Crude Oil has been steadily moving upwards from March 2009 lows of $33 to above $90 and is expected to touch three digits soon. Frankly I don’t know how high crude will be going but history shows that a gradual increase in Crude oil prices can be absorbed by the economy and things will be business as usual.

However a sudden spike in crude oil prices can falter an economy. So lets delve into why prices are touching the roof and how we can profit from it.

Supply And Demand:

Supply is controlled by OPEC to some extend. They produce around 40% of the world crude. They prefer the crude to be around $70.

Demand is increasing in Chindia (China and India). Consumption of US and Europe is not a major concern, but the increaseing demand in Chindia is growing rapidly with their flourishing economies. Improving fundamentals in US and Europe economic just adds to the demand for Crude.

Currency Fluctuations:

US dollar being the world’s reserve currency, Crude and other commodities are valued in US dollar in international markets. Any weakening of the US dollar increases the price of Crude. Currency fluctuation was not a major concern few years back. But with the Quantitative Easing (QE) programs adopted by US to bring itself out from the recession is weakening the dollar thus increasing the cost of crude.

War/Natural Disasters:

Whenever there is a war like situation or some natural disaster in or around oil producing nations, we have a spike in crude prices.

Severe Winter:

Due to global warming, climate across the world are getting extreme. Winter are becoming more severe and so the consumption of gas increases during the winter season.

Profitable Trading Opportunities:

We cannot control the Supply demand or the War/Natural Disasters. But we know that Demand will be increasing with flourishing world economy.

With QE2 program and a possible QE3 program we can expect the dollar to keep weakening for a sometime.

So the best way to create a profitable trade in crude will be to buy Crude in March-April (i.e. summer) and expect the crude to rise by December (i.e. winter). This will continue for a at least 2-3 years assuming that there wont be any recession in next 2-3 years.

Other way round ,we can expect crude price to go down in March/April and can short crude for now and cover our short positions in March-April and get long.

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