By Kevin Grewal, editorial director at SmartStops.net
Over the past few months crude oil has been the talk of the town and its volatility has kept many investors on their toes, but could the valuable commodity be in trouble or is volatility playing its game?
On July 29, crude oil took its biggest hit over the past three months dipping by 5.9% to $63.26 a barrel on the New York Mercantile Exchange as investors became wary of the health of the economy. Most notably, the Commerce Department reported that U.S. durable goods orders dropped by 2.5% from the previous month, indicating that businesses and consumers around the globe are still in save mode and reluctant to make big-ticket expenditures.
The microeconomic pressures of supply and demand are also unfavorable for black gold. A report by the Energy Department suggested that stockpiles surged by 5.15 million barrels to 347.8 million in the third week of July. This increase in stockpiles left inventory of crude 9.5% higher than the five-year average for the period.
Supply for crude oil is just outpacing demand and will keep prices suppressed. In addition, over the past four weeks U.S. fuel consumption has dropped 4.1% from the previous year, led by a 10.7% decline in demand for distillates.
The world's heavy reliance on China as an oil consumer may be in questions as well. The Asian nation suffered its deepest daily decline in eight months on fears that the country's central bank may tighten money supply and banks could begin to restrict lending, even though they say they will continue to implement a loose money supply.
One way the crude oil market could potentially see a rally is through speculation. However this driving force is being heavily scrutinized by the U.S. Commodities Futures Trading Commission, which has been considering implementing position limits for oil futures that could push investors away from exchange-based oil trading in contracts.
Other ways that crude could see a lift are through a major natural disaster, a complete global economic recovery or an increase in consumer spending. As for the near future, these don't seem to promising.
Struggles have already been witnessed by the world's largest publicly traded oil company,
, which recently reported a decline in quarterly earnings of 66% despite rallying from a $62.22 close in March to $71.43 on July 29, an increase of 15%.
Some other equities that are in an uptrend that will be influenced by the fate of black gold include:
U.S. Oil Fund
, which is up 46% after witnessing a February low of $22.86 to close at $33.47 on July 29.
iShares DJ US Oil & Gas ETF
, closing at $43.29 on July 29, a jump of 47% from a March low of $29.40.
Barclays iPath GS Crude Oil ETN
has rebounded nicely from its February low of $14.64 to close at $22 on July 29, an increase of 50%.
When dealing with crude oil, volatility and risk is one thing that all investors must consider. A good way to help mitigate the effects of both is by having a sound exit strategy. According to the most recent data from
, the price levels at which the uptrend of these indexes would be in trouble are: Exxon at $67.50; USO at $32.40; IEO at $41.31; OIL at $21.26. Keep in mind that these trigger signals change on a daily basis as the markets fluctuate and updated data is available at