Why The Oil Rollercoaster Is Over!

Last year when oil went to $147.00 barrel many people blamed the traders, but this was not the full story at all.

Oil and commodities started to become recognized as a new asset class by a lot of investors, and with all the new creative ETFs in the world it became really easy for people that were looking for some diversification to get in on the action.

Historically, commodities like oil, have had more of an inverse relationship with stocks, but over the last couple of months this has not been the case at all.   Both commodities and equities have been doing well at the same time.

In fact, this has been the case for quite a while now. We saw this when with the rally from 2003 to 2007 with energy companies like Exxon (XOM: 73.12 0.00 0.00%) leading the bull market.

Oil in the global economy has become more of an indicator for the global economy’s health, where in the past rising oil prices was a bad thing, because it beat up the best consumer in the world. (U.S.A.) The correlation is evolving in the global economy and both stocks and oil may continue to rise together.

When oil went to $147.00 a barrel and down to $33.00 many of the big money managers got burned hotter than an oil fire. I don’t think you will see that kind of rush to oil like we did between 2007-2008. Oil really traded more like a financial instrument than the actual commodity itself, and got way ahead of itself in that time frame.

Right now, at around $70.00 a barrel is legitimate price for oil, and you will probably see it increase from here, but not make another ridiculous climb to $147.00 in a short period of time.

The three major things to look out for are:

The Dollar. If the dollar falls off cliff, oil prices may go back up to $147 and will continue to rise since it is priced in dollars. This is probably not going to happen. The Dollar will probably decline, but the pace of decline will slow.

Treasury Auctions. As Treasury Auction continues to become weaker and weaker, this should sustain the dollar as rates rise in the free market. This is what will help sustain the slow the pace of dollar decline.

OPEC. It is not in OPEC’s best interest to let oil prices get way out of control, to the point where the global economy contracts and then shuts down.