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Dear GGIS Subscriber,
Oil to $50 or $150...Regardless get ready to load up!
When people say "Crude oil is going to hit $50 or $150, I nod sagely and say: "Yes, probably."
I'm not being a flip. I'm simply giving both the short-term and the long-term timeframes.
Short-term, crude oil is probably heading lower, even though it's nearly 60% off its highs.
The last chance to hold the line on oil prices was at OPEC's emergency meeting. And the oil cartel choked like a cat on a hairball. They cut 1.5 million barrels per day of production when they needed to cut about 3 million barrels per day.
The OPEC meeting was the last obstacle in the way of deflationary forces that are driving oil prices lower in the short-term. Long-term, there are forces that should drive oil much higher. And one of the paradoxical things about the oil market is the longer that prices stay lower, the harder, faster and more furious the rebound will probably be.
The good news is you can make money on both sides of the market.
I'll get to the long-term forces in a minute, as well as potential trading opportunities. First, let's look at the short-term forces.
Short-term Force #1: Economic Weakness
The prices of commodities and stocks are down across the board as investors resign themselves to some form of global recession. Economies from Boston to Beijing are grinding into low gear. And demand for crude oil and gasoline is falling off a cliff.
Here in the U.S., Americans are using around 18.6 million barrels of oil a day, a drop of 1.8 million barrels year over year. Demand for gasoline is decelerating rapidly.
Americans drove 15 billion fewer miles this past August compared with the same month a year ago — a drop of 5.2% and the biggest single monthly decline since 1942, the first year data was collected.
Short-term Force #2: Hedge-Fund Selling
Hedge funds were responsible for much more of oil's climb to $150 than I or a lot of other analysts thought possible. Now, hedge funds are being hit by heavy redemptions as investors cash out and run for cover. One report concludes that investors pulled $210 billion out of U.S. hedge funds during the third quarter, forcing the funds to dump assets, including oil, thereby driving down prices.
The good news is that hedge funds can't sell forever. And in fact, the worst of it should be over by the end of this year as investors square their books and take their lumps.
Short-term Force #3: The Rising U.S. Dollar
As investors flee for safety, they sell risky assets and go into U.S. dollars. This has pumped up the dollar's value. And since oil is priced in dollars, a higher greenback tends to push crude oil prices lower.
With the economy on the skids, why is the U.S. dollar looking like a safe haven?
The reason is that Europe has been hit by the credit crisis even harder than the U.S. And Eurozone countries are responding to the crisis separately — not working as a group.
This undermines confidence in the euro, and makes the U.S. dollar shine by comparison. Also, many foreign banks need dollar financing. That's all the worse for them, because they can't get loans from U.S. banks as the credit crunch worsens.
But the U.S. dollar is due for a pullback in its rocket ride. That said, crude could easily go to $50 a barrel before its correction is over — becoming as deeply oversold on the downside as it was overbought on the upside.
Short-Term Blues, Long-Term Bulls ...
Yes, deflationary forces are at work. And they are growing in momentum. The good news is that, considering the potential magnitude of the declines ahead, the downdraft in commodities should be over and done quickly — as short as it is dramatic. And the end of deflation will clear the way for the subsequent bull market.
So if you made money in the prior phase of the bull market in resources and emerging markets, wait till you see the kind of money you can make in the next phase, with massive opportunities in gold, silver, oil, other natural resources, and emerging markets.
2 Ways to Play This Wild Market:
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Tax & Financial Consultant, RFC
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"A Prudent man foresees the difficulties ahead and prepares for them; the simpleton goes on blindly and suffers the consequences."
Proverbs 22:3 -- Living Proverbs
LEGAL NOTICE: This work is based on SEC filings, current events, interviews, corporate press releases and what I've learned as a financial consultant. Nothing herein should be considered personalized investment advice. It may contain errors and you shouldn't make any investment decision based solely on what you read here. It's your money and your responsibility. Also, please note that due to our commercial relationship with Publc Gold, G&G Associates may receive compensation from a membership purchased at www.publicgold.com/gngpreciousmetals.