When Fed Cuts, Oil will Hit 100

Debate over the rapid rise in oil prices ranges from blaming geopolitical events, Arab producing nations, big oil companies, hedge funds and the like. All have something to do with the rise, but hedge funds are surely pulling more of the strings than the others. Nothing else explains the extraordinary jump in prices in the last days. In fact, hedge funds are far and away the principal actors behind the oil bubble we have seen of late -- and they are about to profit even more handsomely when the Fed drops the interest rates tomorrow.

Debate over the rapid rise in oil prices ranges from blaming geopolitical events, Arab producing nations, big oil companies, hedge funds and the like.  All have something to do with the rise, but hedge funds are surely pulling more of the strings than the others.  Nothing else explains the extraordinary jump in prices in the last days.  In fact, hedge funds are far and away the principal actors behind the oil bubble we have seen of late -- and they are about to profit even more handsomely when the Fed drops the interest rates tomorrow. 

So if $93+ per barrel seems awfully high and the rise awfully rapid, just wait until the Fed announces a 25 to 50 basis point cut in interest rates.   And, the Fed is, albeit unwittingly, about to hand off additional huge profits to the hedge funds.  With lower interest rates, the economy goes into overdrive and demand for energy increases proportionately.  As if that were not enough to ensure that hedge funds will keep pushing oil prices higher, with cuts in interest rates the dollar will continue its fall.  And further weaknesses in the dollar forces producing companies abroad to increase prices to maintain profits.  

It is all painfully simple and painfully obvious.  When things are this obvious, traders win.  Individuals will get burned at the pump and the home furnace.  The hedge fund traders will do just fine.  But, if  the individual investor wants some protection from a pocketbook situation that is about to worsen, he ought to go out today and buy oil stocks.  XOM, which is down today, will be up big tomorrow after the Fed's action.  It is a strong play and a strong buy. 

 

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Comments

  • art

    October 31, 2007

    I think it will easily hit 100, but almost immediately crash back to 60. These prices are not sustainable. It is a bubble, pure and simple.

  • casey

    November 01, 2007

    Oil output has peaked. If you look at the raw supply numbers 2006 had less output then 2005 and 2007 looks to have less then 2007. There are Geo-political factors but the bottom line is we are running into supply problems which will become very evident in the next 1-5 years. Yes - there is some speculation but its not a pure bubble.

  • JRodgers

    November 02, 2007

    There was a guy from Tessoro on Fast Money last week who argued that there numbers show that with theh current supply-demand balance, prices should be around $60 a barrel and this is all hedge funds driving the market.

  • Jeff Seymour

    November 02, 2007

    Sam Cass has written so great stuff on this topic and on related topics all over this site. He is right on the money with this:

    http://www.bestcashcow.com/commodities_-_oil_-_gold/article/sam_cass/record-oil-prices-manipulated-by-traders

    Oil and commodities are terribly overvalued and have been brought to current prices by hedge funds. There are fundamentals that support a high price in some of these commodities, but not this high, and Chinese demand is only so strong.

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