The psychology of people involved in the stock market never ceases to amaze me. On February 11, 2016, crude oil traded as low as $26 a barrel, but people in the market were terrified to buy it at that level. That's when the financial talking heads were saying that oil would go down to $10 a barrel. Remarks like that caused people to avoid investing in crude despite the commodity trading at new yearly lows and being severely oversold. Now crude is trading above $50 a barrel and people are afraid to sell it short -- despite crude's rally higher by nearly 100 percent since February.
Major Resistance
Today those talking heads are saying that oil will go to $75 a barrel before peaking out. Isn’t it funny how these so-called experts come up with these levels? What are they basing their guestimates on? The truth is, they're probably hoping oil comes back to that level so their investments can work out or recover from the 2016 decline earlier this year. If anyone looks at a chart of crude oil, they will clearly see that it has major resistance around the $50 to $55 area. Today, crude is trading around $51 a barrel.
There are many factors that affect the price of crude oil. Some include production output, weather, geopolitical events and the U.S. dollar. Of these factors, USD strength and weakness seem to be most important. Please understand, most of the oil in the world is traded in U.S. dollars. So if the dollar is strong against most other currencies, the oil price will likely decline. That was certainly the primary reason for crude's decline over the past two years.
There are many ways to trade oil despite using oil futures these days. ETF's and ETN's such as the United States Oil Fund LP (NYSE:USO), iPath S&P GSCI Crude Oil Total Return (NYSE:OIL) and the ProShares Ultra DJ-UBS Crude Oil (NYSE:UCO) are just a few different vehicles that can be used to trade oil on the long side. Some short-side trading equities for crude include the ProShares UltraShort Bloomberg Crude Oil ETF (NYSE:SCO) and the DB Crude Oil Double Short ETN (NYSE:DTO).
Full disclosure: I currently own SCO shares.
