Investing Blog

Since the beginning of June I’ve believed that oil prices would soon correct to the $110 area. The prior two weeks have told me that no high is high enough and that the price of oil will rage on through the fundamentals in Iran to the falling dollar. But as it was reported last month, the amount of short sellers is finally outnumbering the buyers. This should stand to say that oil companies may be actually shorting the price of oil to hedge themselves against falling prices. Through futures options and other strategies, oil companies are able to hedge their production amounts against current prices via options and still earn the same amount per barrel whether oil is $150 or $50.

If oil drops, the short position makes money. If oil rises, the short position loses very little while their production makes money. The amount paid in a premium is relatively low and hardly affects the cost of the trade. This market action is just the normal cost of doing business.

Judging from this data I think it is now safe to conclude that oil will be falling in price as summer ends. In this election year cycle, it would be even more likely to see lower crude prices and a slower FED. If the contraction in oil occurs it should drop to the $110 level within a few days. $110 was extremely psychological and a very strong resistance point and will surely be support on the way down. Short sell here.