Sunday, February 26, 2012

Iranian Oil Reliance Hurting Consumers Globally Due to Futures Trading


As tensions with Iran cause investors to sway back and forth with each passing headline, we are all beginning to feel the burden. The fears and concerns investors have over the future of oil and it's uncertainty has caused it to spike to an uncomfortable $126 per barrel. As Iran has announced that it will halt oil shipments to Britain and France before the allotted 6 month period to find new suppliers, it caused investors to scramble over uncertainty of Europe's oil supply, even though Iran only supplies France with 3% of its oil and Britain had already stopped buying from Iran, this shift in the oil trade still caused mass disruption. This is where things become upsetting.

It is estimated that for every cent that gasoline goes up per gallon, 1 billion dollars less are spent per year by Americans. This recent spike of roughly $15 dollars since January 3rd to today makes gasoline prices a harsh 35.7 cents higher per gallon. When gas prices go higher, people have less of an inclination to go out and make purchases, especially since they have less money to spend in the first place. Take the estimated 1 billion less being spent per year and calculate it for just the one month left before the first quarter is over, and we already have an incredible 2.975 billion less being spent in the economy.

We know what this means. Less people will be out shopping and making purchases, focusing more resources towards necessities, while the rest of the economy will begin to slump, with shrinking profits overall. Once Q1 is over it will be revealed in the reports that many companies will have undershot expected earnings, and concerned investors may begin to drop out. This may cause a noticeable correction in the market, and we may even end up seeing a repeat of the summer, with incredible volatility and consistent daily changes of the Dow Jones in the hundreds. This will not last long as the market evens out again, but this drop will be an expected market correction, as the Dow is currently at a 4 and half year high and appears to be a bubble waiting to burst.

There is a bright side to all of this, however. With the market correction expected, and the Dow finally dropping, oil can also be expected to drop with the tide of the Dow. This will help ease the strain on the already fragile economy and more money will start to be spent. For investors, be aware that this temporary drop in oil prices will be the best time to buy. I highly recommend looking into purchasing Oil Futures options (for experienced investors), or looking into an exchange-traded fund such as USO. Or even the stock of some of the oil companies themselves, such as Exxon.

This will not be a losing investment, because even though the price of oil will fall with the market, once another headline from Iran comes into view and more tensions begin, investors will remember why oil was so high in the first place and it will once again spike up. You must wait for the market pullback. If you buy-in before, you will lose on the drop. Expect earnings reports to cause minor market corrections.