TheStreet.com Ratings: How to Play the Drop in Oil
Oil traders on the New York Mercantile Exchange are concerned that there is nothing left for them to fret about. The U.N. deadline for Iran passed without war breaking out, Hamas and Fatah are building a united Palestinian government, OPEC is keeping the taps wide open, and the Gulf of Mexico has so far avoided the 2006 hurricanes.
With all this good news, the October crude oil futures contract plummeted 21% from a high of more than $80 per barrel to a low of just under $64 a barrel.
But have no fear. These threats that trouble the oil markets, and hike the price of crude, will eventually return. Iran's President Mahmoud Ahmadinejad isn't finished giving speeches. As for OPEC, the taps will stay open because they want to keep the price of oil just below where alternative energy sources become profitable, but not a penny lower. The multi-decade, active cycle for hurricanes continues.
In the short run, some oil-industry bearishness remains as gasoline supplies are rebuilding, now that the summer driving season has concluded. In the long run, the main driver for the price of oil is still the competition between oil supplies and global economic growth. Sure, the U.S. continues to putter along with 3.6% GDP growth, but the big global growth story is China. Chinese year-over-year GDP growth as of June 30, 2006, grew at 11.3%, the fastest rate since December 1994.The short-term weakness presents an opportunity for investors to snap up shares in energy and natural resource exchange-traded funds (ETFs) while the sector is off its high and even selling at a discount.
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