Profit Taking, Reduced Contango Suggests Oil Prices Could Stabilize
by shahid hussain
on Tuesday, June 9, 2009,
The last three months have seen a remarkable oil rally that has doubled the price of oil from around $35 a barrel earlier this year, to nearly $70 today. During this bull run however, there has been one nagging thought spoiling the fun of the traders cashing in on this rise – there is no real reason for oil prices to have climbed so high, so quickly. Demand has not suddenly shot up and the economies of the major oil consumers have not improved significantly, so why the price increase?
In reality, the market is oversupplied with oil. Yes, OPEC reduced production but only nominally and US oil and gasoline reserves have not been this high in years, so again, why the increase?
Obviously, traders are banking on a quicker-than-expected recovery and are pricing this optimism into the market, but there are two factors that could soon stall oil’s climb – a strengthening US dollar and a reduction in the oil contango trade.
When the US dollar is under pressure, gold and oil are usually the recipients of extra demand as investors often turn to these two commodities to hedge a falling US dollar. Today, the US dollar bounced back after several days of losses to... Read more »
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