The sudden leap in oil prices has been yammered about – Oil jumps $25! – but, in fact it is a market anomaly brought on by the expiration of a futures contract. The contract expired today and many of those who were short the contract – hoping that it would go down – were caught on the wrong side of the trade. They had to get out of the contract before trading closed – else they would be taking delivery of that physical oil (oils well that ends well). This short squeeze was accentuated by the quibbling about the financial system bailout package in the US congress. Markets climb a wall of worry. Oh, oops – I guess the equity markets didn’t climb. Well, the commodities took advantage of the low magnitude of chaos to climb.
So, oil going up is good or bad? Here is a simple view. Traders have an eye on the world economy – with a sharper focus on the US. When the economy slows down, less activity translates into lower oil usage. At least a decrease in the increase of usage. Irrespective of the market action showing a $25 blip in oil prices, the price of oil will open around $108 on Tuesday morning – not $130. $108 is still up from last week and if the oil traders are right, then they are expecting economies to not glide into a slow down. Not to say it will be a pick up in activity, but perhaps stability. Oil is a two-faced mistress – dropping below $100 a barrel encouraged even one into thinking the economy was fine, which in turn restarted the bullish trend in commodity prices, which may in turn push prices down again because of the friction of high energy prices on the economy….
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