Speculation In Oil? Who Cares?

With traded commodities, the question is always how much is demand and supply and how much is pure speculation?  Oil set a new record today almost touching $128 per barrel before settling back a little.  Should oil really be $70 based on the demand and $58 is speculation by investors driving up the price?  Or, is the speculation only $10 per barrel.  Is China hoarding oil?   

To tell you the truth, I don’t think it matters.  Nobody knows and everybody has an opinion.  I’ve been spending the week try to find different ways to invest in energy in general but have the best exit strategy.  You can’t go into any investment that has doubled in the past year and just buy and hold.  Many investors bought into tech stocks in late 1999 only to get burned a few months later.  I still believe oil is a better short than long for the short run but don’t have a position at this point.

But that leads me to something where we don’t have to worry about speculation.  The Baltic Dry Index is a combination of various indexes that measure the cost of shipping dry bulk goods from one location to another, whether it’s wheat from the U.S. to China or any other commodity.

Prices for shipping these dry goods across the world don’t go up just because shippers want to raise prices.  There has to be demand there to drive prices up.  It’s also a component of how many ships there are as well.  Less ships means higher prices.  In any case, you can see in fig. 1 that late last year this index dropped by about 50%.  It’s since recovered and is off to new highs.  I’ve also shown the correlation the dry shipping stocks which are extremely correlated to this index.  Dry Ships (DRYS) is the largest of the group.  I own Diana Shipping (DSX) shown in yellow. 
Baltic Dry Index


So, while others are trying to figure out why oil is going up and when will it come down, let’s trade some stocks that give us an easy template to follow whether the stocks are good or bad to own.  By the way, the fact that this index is at all-time highs is very good.  This shows the global economy is doing just fine.  In fact, if you dig around, you’ll notice stocks that are near their all-time high have a lot of exposure to developing markets.  Most of their sales come from abroad.  Even within industries such as container companies.  The ones that are struggling are have most of their business coming from the U.S.

You can monitor the baltic dry index in a few places.  I use my bloomberg machine.  You can find it for free at http://www.investmenttools.com/futures/bdi_baltic_dry_index.htm

Have a good weekend.


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May 2008
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