Oil: The perfect hedge for just about any occasion
Energy Report
by Phil Flynn
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2008-07-02
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What about fears that world oil production is peaking and we will never ever be able to meet growing demand from the emerging markets. Just chill out because you can hedge it with oil. What if you are worried that US investment banks on the verge of failure? Just to be safe you can hedge it with oil. The Federal Reserve is stuck behind the eight ball as Europe raises rates and we can't which might stoke even more runaway commodity price inflation? You guessed it, hedge it with oil. What if you're worried that a small tropical wave somewhere off the coast of Africa might become a tropical storm or hurricane that can eventually end up in the Gulf and rip oil platforms out of the Gulf and ruin your holiday weekend?
No worries! Just hedge it with oil.
That's right that it is those all purpose oil contracts that will hedge just about anything that ails you. In fact who knows it might even clear up a nasty complexion and may take away those unsightly wrinkles. It's like Hedge-0-Matic. Just set it and forget it. Oil is a proxy for every thing and an accurate reflection of our deep seated fears and all of our insecurities. It is also a reflection of a commodity that is in tight supply and one that will still have value if the rest of the financial world comes crumbling down around us.
You can call it "speculation" if you wish but that does not do the free market-place justice. That's like saying the Mona Lisa just a painting. (Well it is just a painting but you know what I mean) The hedging of risk accurately reflects the changing fundamentals around us and if the markets did not give us an outlet for these fears we would most likely see shortages and dislocations. For example if the dollar continues to sink further into obscurity and did not exist does anyone think that oil priced in dollars would cost more? And if the markets did not exist and the sellers of the wet barrels in a global market place thought that the dollar was going to lose more value quickly? Might they want a premium paid to them because of the hassle of taking a falling currency?
What about the stock market hedge? If the stock market crashed and the oil market for speculators did not exist wouldn't the big money guys sell stocks and but hard assists? Like, let me see, hard assets like oil perhaps?
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Phil Flynn
Phil is one of the world’s leading energy market analysts, providing individual investors, professional traders and institutions with up-to-the-minute investment and risk management insight into global petroleum, gasoline and energy markets.
Energy Report has contributed 165 issues.Our users give the newsletter an average rank of 8.4/10 (24 votes)
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