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How the Market Works

fOiled Again: OPEC is NOT the Big Meanie

Posted by kdadmin on August 14th, 2015.

fOiled Again:  OPEC is NOT the Big Meanie

Now that we’re in cash, people love to ask me about investing in their pet investment idea. From gold to oil to pork bellies, I’ve heard it all.

We talked about gold last week. So, let’s cover oil.

Have a look at the chart. Notice anything about WHO is driving production levels? It’s the USA. Whereas, over the last 25 years,OPEC has been relatively consistent. Notice anything else? How about how as the USA has overproduced oil for years, the price of oil has finally tanked. Notice how our production has not tanked? Yet.

Oil is extremely volatile, but the price isnot Greece’s fault. Oil is fundamentally a commodity. Which means it’s largely driven by supply and demand. Simply put, this is how the market works.

In other words:

  1. USA production remains at record highs.
  2. OPEC remains constant.
  3. It’s unlikely that we’re at the bottom of the oil market.
  4. It’s VERY difficult to buy directly into an ETF that properly tracks the oil markets. Buying oil producing companies directly subjects you to their unsystematic risks. Further, most oil ETF’s trade the underlying futures, which makes them subject to the decay of expiring contracts.
  5. Black Swan events (like war, natural disasters, political posturing, etc.) can change the price of oil without warning.

Short story:stay out of oil. For now.


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