mines prices markets

The recent volatility in oil prices has managed to capture quite a few headlines in the news media and in prominent financial publications over the course of the last few years. Oil prices today continue to hover at historically high levels. Rising gas prices have brought heightened interest in crude oil pricing outside of the trading community as consumers just beginning to recover from a lengthy recession have seen their budgets pinched by $4.00 per gallon gasoline.

While many writers reporting on the commodities markets have been quick to point the blame for rising prices on futures traders and speculators, there are much larger forces influencing the market that tend to drive the direction of the overall trend. Regardless of what traders do on a daily basis, supply and demand is the single most important factor in determining the price of commodities over the long-term. A quick look at how the market reacts when the Energy Information Administration releases new inventory supply numbers is one of the best ways to see this in action. Major supply disruptions or even news stories that imply a possible future problem have historically resulted in turbulence or heightened buying activity.

What many consumers fail to realize is the direct relationship between oil prices today and the value of the dollar. Because oil and other commodities are priced in dollars, a stronger dollar makes oil less affordable to buyers using other currencies. When the dollar strengthens significantly against other foreign currencies, steep declines in the value of a barrel of oil tend to follow in lock-step. It’s no secret that the value of the US dollar has been in decline now for the better part of a decade. Due to the inverse relationship between petroleum and the dollar, it is fair to conclude that the weak dollar policy of the federal government has played an important role in the dramatic surge in oil prices in recent years.

Are Rising Oil Prices Good or Bad?

The answer depends on your relationship to the commodity. If your only exposure to the oil market is on the consumer side, expensive fuel is a clear negative. It drains your budget and drives up the cost of food, air travel, shipping, etc. On the other hand, if you hold an interest in a company that produces gas and oil related products or services, you’ve likely enjoyed some impressive returns in your portfolio.

For those of you who find yourselves shaking your head each time you pass your local service station, one way to cushion the effects of market volatility on your daily life is to adopt an oil-neutral stance. This is a simple strategy almost anyone can adopt where you invest a small portion of your portfolio in gas and oil related stocks to create a hedge against rising prices at the pump. In its most basic form, you can accomplish this by purchasing shares of large integrated companies such as Chevron, Conoco Phillips, or Exxon Mobil. More advanced investors may want to consider adding some international exposure such as PetroChina (China) or Petroleo Brasileiro (Brazil) for diversification. Another strategy is to use energy royalty trusts which hold an interest in property rights where an outside drilling company will come in and pay royalties to extract the resources. Many investors like these because they tend to pay out significant dividends, sometimes on a monthly basis! For the average consumer, this is a low-risk way to smooth out some of the bumps in the market and avoid always being on the wrong side of the trend.

Aggressive investors who have a considerable amount of trading experience and are willing to take on more risk can participate directly in the oil futures trading market using services such as Options Express and Interactive Brokers. These robust trading platforms provide the tools needed to participate in the market while taking advantage of deeply discounted trading fees. It is important to note that futures trading is only recommended for the most skilled and experienced traders. You can use the chart below to see the current real-time oil prices today.

Recent Price Activity:

November 30th, 2011: Crude oil futures were up $0.19 per barrel to close at $100.55.

November 16th, 2011: Futures prices breakout above $100 in midday trading briefly rising above $102 per barrel.....READMORE