Special Year-End Report: 2008 Top Futures Trading Systems

Get daily research letters from Phil Flynn of Alaron Energies

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. Phil's market commentary, fundamental and technical analysis, and long-term forecasts are sought by industry executives, investors and media worldwide. Now you can get this highly sought after analysis with your daily research newsletter from Phil Flynn. Learn more about this complimentary offer and sign-up today.

Perhaps one of the most misunderstood markets of all time may in fact be the oil market. Many people have misconceptions about oil and its place in the global economic universe. There are many false perceptions about the price of oil and it impact on our lives and the economy and attitudes that seldom change despite the evidence to the contrary. People think that every time that the price of oil goes up that it is a bad thing for the economy. They think that oil is controlled by OPEC or even the big oil companies. The truth is that oil prices and the oil market may be your best trade in these turbulent times. In fact oil may be the market that can save your battered stock portfolio. 

If you look at the history of oil especially the last few years' oil has reflected strong global economic growth. In fact if you look at a chart of the Dow Jones average and a long-term chart on oil it is clear that a strong oil market can reflect a strong stock market and good economic times. Oil has been a good leading indicator of good economic times. It has also can be a good hedge against all that ails your stock portfolio.  And if you sold oil when the stock-market went bad it would have helped you reduce your losses in your overall portfolio. Oil went up in economic good times and it is going down as the world faces significant challenges. It is time that you rethink everything you ever thought about oil and its time you use oil as part of your investment strategy.

In recent months it has become obvious that the great rush to oil has come to an end. As the realities of the depth of the global financial crisis has sunk in it seems the optimistic predictions of where oil prices might go became a pipe dream.

Last July it seemed like was riding high. The oil and the oil traders went on a bullish rampage. The world went into a global oil mania. There were predictions from some said that oil could go as high as $200 and even $300 a barrel.

Now in just a few short months from oil is struggling to stay in the $30 a barrel range. Instead of oil supplies running out are facing the largest oil glut in years. Oil Supplies in the United States the world largest consumer they are bursting at the seams. Not only are supplies are at a 16 year high but supplies at Cushing Oklahoma where the world benchmark price is set supplies are at an all time high. In fact they have so much supply that they are almost out of space to store it.

Now currently the oil market is in a contango a market phenomena where the oil for today's delivery is much lower than that of delivery in the future.

Now some say that is because the future outlook for oil demand is better in the future but with the economy so bad that may not be the case. It could be a simple that the market fears devaluation in the dollar and inflation in the future. In fact with such a large difference between the front end and the back end of the futures market that spread could present awesome opportunities as the glut of oil supply should bring down prices dramatically as we get closer to expiration. Because prices will come down if we have an over supply and demand does not rise. So unless you believe that demand is going to improve dramatically in the future then you want to find the way to play this curve.

And demand prospects do not look good. Recently International Energy Agency an oil advisor to the world's major energy consumers and has 28 member countries just recently said that they expect that world oil consumption will fall one million barrels to 84.7 million barrels a day which is the biggest drop in global oil demand in 27 years. The US Department of Energy Agreed with that bleak demand outlook predicting that oil demand would fall by 1.2 million barrels a day in 2009.The high price of oil rationed supply and the global economic slowdown has assured us that we will lots of supply of oil at least for awhile. Traders can take advantage of the contango by plying this curve. If you know the fundamentals and the correct strategies for the size of your account you can profit if this the economy stays weak.

Oil is a good hedge against this crisis and traders use oil as a financial instrument. This year oil investors went to seek safe haven away from the credit crisis that gripped the nation. Oil moved more on news out of the Federal Reserve and words from Ben Bernanke then it did on inventory numbers from the Department of Energy. People bought oil as they feared bank failures and the failures of Fannie and Freddie. They bought oil as safe haven.

It is clear that what we had going on in the first six months of this year was clearly crisis buying and that type of buying in oil is unsustainable. It exploded not because of strong growth but it rose as traders to adjust to the US economic crisis Oil traders used oil as a hedge against uncertainty. They used oil as a hedge against bank failures. They bought oil on the false assumption that the rest of the world had decoupled from the US economy. They bought oil because they thought the rules of the game had changed and oil would always go up no matter what happens in the rest of the world.

Now because of this severe shock to the system and the fact that oil prices convinced people that they could go higher the market built in some very bullish long-term expectations. Expectations that may not come to pass in the next quarter, I expect oil demand based upon recent signs and economic data could fall an additional 2 million barrels a day. That means those lofty far out prices in oil will likely be unsustainable. If you are able to ride out the volatility between expirations as we get closer to the delivery. The mountain of crude becomes more ominous as time goes by.

To trade this you have to be aware of the timing and the mood of the market. You can play it with futures and options but the best way is a combination of all. But with the contango and a weak economy time is always on your side.

Phil Flynn is Vice President, Energy and General Market Analyst with Alaron Futures and Options and is one of the world's leading energy market analysts. Phil heads the Alaron Energies Futures Brokerage Division offering brokerage services to individual investors, professional traders and institutions. Phil provides up-to-the-minute investment and risk management insight into global petroleum, gasoline and energy markets. Phil's market commentary, fundamental and technical analysis, and long-term forecasts are sought by industry executives, investors and media worldwide.

Phil and his energy team were one of the first to predict that global crude oil prices would exceed $30/barrel in the year 2000, a correctly predicted market milestone that has highlighted the economic scene in the new millennium. Phil also called the rise of retail gas prices in 2001. Most recently, Phil Flynn has again accurately predicted that global crude oil prices would reach close to $40/barrel ($39.99/barrel) in 2004. Through hundreds of media interviews, Phil Flynn and Alaron Futures and Options have become familiar names in living rooms and boardrooms worldwide. The world's print, broadcast, online media and small businesses have come to rely on Phil's accurate and animated forecasts, analysis, speculative and hedging opportunities.

Get daily research letters from Phil Flynn of Alaron Energies

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. Phil's market commentary, fundamental and technical analysis, and long-term forecasts are sought by industry executives, investors and media worldwide. Now you can get this highly sought after analysis with your daily research newsletter from Phil Flynn. Learn more about this complimentary offer and sign-up today.