Commodities: Oil Prices Rise

There are a number of variables involved with the overall commodity sector, and oil is affected just as much as all the commodities.

Some of the obvious factors are the economic slowdown, forced liquidation and deleveraging that have had the type of impact that has caused commodities to be very volatile, in contrast to their normal predictable behavior in an economic slump.

For example, gold would usually be considered the place for investors to put their money when recession times like this are upon us. But gold hasn't skyrocketed the way it normally would have, although signs are it's starting to do that now, along with silver, platinum and other precious metals.

Oil prices especially are affected by the economy, as consumers stay home rather than using their disposable income on gas. That has caused oil stockpiles to rise and prices to plunge. The oil surplus has alos caused gas prices to fall in a major way as well.

In an attempt to put a halt to the surplus, OPEC is cutting oil production even more in an effort to shore up prices. Oil companies have cut back on drilling too, as the lower prices keep them from keeping too many wells in production.

Even though stocks have risen a little recently, traders are starting to look again to commodities as their choice of investment. U.S. dollar related investments are becoming increasingly risky in this environment, as the government goes into horrid debt, which the Federal Reserve will have to pay for by keeping the printing presses running full time.

Those who think the proposed Obama stimulus plan will change this are in for a big surprise, as it will only add fuel to the fire, and will do nothing to help the market. In truth, the market doesn't need to be helped, and the Obama big government machine needs to realize that.

While futures traders are looking more favorably at precious metals, they're puzzled about oil, as it seems many are attempting to make it look like it's going to continue to go up, but the underlying fundamentals aren't pointing that way.

No matter what OPEC or others attempt to do to inflate the prices, the higher oil goes, the less people will buy. Demand will go down, and prices with it. What will the government do, implement oil price controls? That's already proven to be a horrible failure which will launch oil shortages. History has proven this is always the result of price controls.

Consequently, the idea that oil stockplies will decline is ludicrous, for the reasons stated above. People holding tight to their money aren't going to change their habits when oil prices rise. They didn't do it when prices had plunged far below the current levels.

To underscore that, even as oil prices have risen for a couple weeks, so has crude inventories in the U.S., rising by 14 million barrels in just three weeks, says the Department of Energy's Energy Information Administration.

I'm not sure where oil industry watchers think the commodity will continue to rise, but it's a fallacy, and those betting on it are going to lose big time.

Some people think oil is totally unpredictable, as they're moving away from supply and demand, and instead are looking at governments who are attempting to game the market by their bailouts and cutting of oil production. Those artificial efforts are useless.

Commodity prices will rise in 2009, but oil won't be included in that basket. It may rise some, but the trend will continue for some time. It's moving lockstep with the economy, and people have stopped spending their money on travel. Nothing a government can do will change that reality.

Oil is one commodity I would short. Unless there's something unknown that happens, that will be the reality for some time to come.