WINDERMERE, Fla. (Stockpickr) -- Here we go again. Crude oil is closing in on $100 a barrel, and it's happening faster than I think most traders want to believe.
Recently, crude oil traded through the $90 level, which marked a 26-month high. The bulls in the crude market are saying that oil is experiencing a "demand shock" due to consumption growth, which this year is almost at its highest rate in 30 years. The bulls will tell you that demand is being driven by a recovery in global economies from the depression-like levels we've seen in the last few years. Many analysts will also tell you that crude oil demand is being spurred by emerging market expansion in China, India, Brazil and the Middle East.
What's really interesting about the current strength in oil is that it's happening in the face of a strong dollar. Usually, commodities that are dollar-denominated trade lower when the dollar strengths. However, that's not what we're seeing right now with crude oil. It's trending higher despite the fact that the dollar has been strong, and I think this has caught a lot of market players off guard.
Whenever I see a market decouple like this, or a stock do something that nobody thinks is possible, I revert back to my trend-trading acumen and remember that price always pays. If you've been shorting oil hoping for it to drop based off of the action in the dollar, then you've been fighting the trend. Since early November, the dollar has soared from its lows around $75.60 to its most recent highs at over $81. During the same time frame, crude oil initially sold off from $88 a barrel to around $80, but instead of continuing that trend lower, it bounced huge and rallied from $80 to over $90 a barrel.Why is oil trading so strongly despite the strong dollar? There are probably a number of solid reasons for the strength in oil, such as quantitative easing, which many traders view as an inflation-causing policy. Market players could be bidding up the price of oil in anticipation of more quantitative easing (QE3) that could be coming down the road. We also have a war premium in oil that could have re-entered the equation following North Korea's most recent hostile actions towards South Korea on Yeonpyeong Island.
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