Friday, June 5, 2009

Commodity Rally...Is it For Real?

Commodities, particularly oil and gas have continued to run. Crude oil has now reached nearly $70/barrel. Is it the dollar weakening? An economic rebound? Or is it speculation? I'd say its a little of all three.

1) The dollar has weakened, and this has helped as it typically has a negative correlation to oil prices. Not a huge factor yet.

2) There have been signs the economy is stabilizing, but to me, you cannot say we've seen a return to growth. We have massive efforts by the Fed, Treasury, and Washington (stimulus) to make this economy turn. Job numbers have improved, but we're still looking at 9.4% unemployment. This economy will not strengthen without the consumer.

3) Speculation is rampant. Traders love commodities and particularly oil. Zero Hedge had a post about this yesterday. If you look at natural gas (UNG) which everyone is trading, we're seeing massive volume. Yesterday reached 70+ million shares on fund with an average of 15 million shares traded daily. UNG is a separate story as supply numbers continue to outpace demand, but the long term outlook remains good. So although natural gas hasn't rallied that much, UNG has been profitable to trade.

Bottom line here is that the rug could be pulled out from this, and rather quickly. But in order for that to happen, you need the same three factors to reverse. Most likely scenario is oil prices don't see their previous lows, but establish a new trading range between $50 to $75 barrel. I believe this mostly because the economy is stabilized and the major fear is gone. This will bring more confidence to buyers of oil and related stocks.

Missed my opportunity to buy UNG yesterday when it dipped in the morning. I'll get in eventually, and will post when I do.

Disclosure: No Positions.

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