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US Stands to Benefit If Oil Prices Slide. Learn How and Open a FREE $50,000 Practice Trading Account Today! No risk. No obligation. Register Now & Start Trading!
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In 2006, oil prices are on the rise once again, with crude setting fresh record highs in the process. In April alone, crude prices increased by a whopping 20+ percent, leading many to ask how much longer this rally can continue. The latest round of oil strength stems from Iran's announcement that they have successfully enriched uranium for the very first time. Geopolitical tensions are rising as the oil market fears that the US may respond with an attack on Iran, the holder of the third largest oil reserves in the world. The US does not import any oil from Iran, but many countries such as Russia, China, and some European nations do.
How Much Worse Can Things Get? Or: How Much
Better?
When the mania hits a peak and everyone is screaming that things will only worsen, we may be near a top. Just think back to the hysteria points in August 2005 and February 2006. In both rallies, prices first rose by 26 and 21 percent respectively. At the time, the market became extremely concerned, gasoline prices skyrocketed and unsurprisingly, oil prices tipped over shortly thereafter to erase at least two thirds of the gains before rising once again. Therefore, it is certainly possible that we are at a similar turning point in oil at this moment. Back in November and December of last year, when we were entering the winter season, the prospects for oil looked the most dismal because energy usage at that time was a necessity. Now in contrast, even though we are moving into the usually busy summer driving season, taking extra road trips with the kids is something that can be avoided.
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- Only Trade with money you can afford to lose.
- Before you enter the markets, know thyself!
- Learn how to walk before trying to run.
- Trade carefully... and don't over commit.
- Seperate your trading from your desire for profit.
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Hope On The Horizon: Profiting While Oil
Prices Crash
Oil Speculators Trade Currency. You Can Too!
If oil crashes, there may be a ripple effect on many economies. In the Middle East, a lot of wealth and home valuations are tied to oil, making it even more important for those traders to look for hedging opportunities. The same is true here in North America. As the world's second largest holder of oil reserves, Canada has been one of the primary beneficiaries of the rise in oil prices, which means that if oil crashes, it may also be the currency that will suffer the most. Canada's booming economy has been fueled by the climb in oil which has benefited domestic corporate profitability. It has also sent the Canadian dollar to 28 year highs against the US dollar by boosting the international purchasing power for Canadians.
How The Dollar - And You - Can Benefit From
This Trade
In contrast, the US stands to benefit greatly if oil prices slide. For months now, there has been a widespread fear that the rise in oil could weigh heavily on consumer spending. With the housing market bubble already posing a big risk for the economy, the potential impact of skyrocketing oil on spending has been one of the biggest arguments against a prolonged Federal Reserve tightening cycle. The lower the price of oil, the more stimulative it is for the US economy as discretionary income of US consumers increases. Therefore, if oil does crash, this fear of an economic slowdown may be greatly alleviated and be taken as a promising sign by dollar bulls. Of course, this may bring up the question that since oil is priced in dollars, why wouldn't the dollar suffer from a decreasing value of oil purchases. The answer is the same answer as why the dollar does not benefit from the higher price of oil. It is because a lot of central banks already have reserves in dollars, and the same is true for companies, which means that they do not need to convert additional money into dollars in order to fund new purchases. This makes the long USD/CAD trade the perfect hedge against falling oil prices.
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The chart above clearly demonstrates the close tie between oil prices and the Canadian dollar / US dollar currency pair (conventionally written as USDCAD).
When oil prices rise, USD/CAD falls and vice versa. Since the beginning of 2004, the correlation between these two products has been a strongly negative 86 percent. For the US, sliding oil prices would bring about improvements to the US economy and the prospects for higher US interest rates. For Canada, the Canadian economy would suffer, and in the scenario of the extreme even force the Bank of Canada to cut short their tightening cycle. If so, this would be very negative for USD/CAD. Therefore, USD/CAD is a very interesting trade to look into if you think the oil move is overdone and may be due for a retracement.
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Get your Complimentary Precious Metals Seasonal Outlook
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How Rising Oil Prices Could End By Hurting
Canada
Furthermore, after recently breaching 28 year lows, the USD/CAD is displaying signs of indecision, suggesting that support may come in soon enough for the currency pair. It was only four years ago that the dollar was trading at 1.60 against the loonie, and we are already showing signs that the sell off may be nearing an end. This could make it an even more attractive trade if you need to hedge against a slide in oil. Trade the USD/CAD with a free practice account.
Eventually, as oil continues to rise, the benefits for the Canadian economy may begin to subside. The market tends to forget that Canada is also a huge net exporter to the US; therefore, the stronger the loonie, the weaker the exports. Canadian automobile exports have already begun to suffer.
Learn more about trading currency based on oil price fluctuation and its advantages over trading oil stocks and futures.
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US Stands to Benefit If Oil Prices Slide. Learn How and Open a FREE $50,000 Practice Trading Account Today! No risk. No obligation. Register Now & Start Trading!
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