Why Is Oil So Bleeping Expensive?

| August 19, 2013 | 0 Comments

oilOne of the more interesting and popular investments out there is crude oil.  The price of oil is still an important barometer of economic growth.  And, it continues to confound and frustrate consumers (and traders) across the world.

The key question surrounding the oil market is why is the price of crude so high?

After all, from a supply side perspective, the world is producing more oil than ever before.  Not to mention, US inventories are running at record high rates.

But what about expensive shipping costs?  Oil-rich countries like Saudi Arabia aren’t exactly located next door. 

 Here’s the thing…

The country the US imports the most crude oil from is in fact next door.  It’s Canada.  So, once again, why the huge premium on oil prices?

There’s really no easy answer to the oil price riddle.  However, there’s a very important factor to consider.  The price of oil isn’t just about supply – it’s also about demand.

While oil supplies are as high as ever, so is oil demand.  As developing countries grow, they demand more and more oil.  That means places like China and India will continue to need massive amounts of oil to satisfy the growing wealth of their enormous populations.

Moreover, the price of oil is based on a global market.  That means it isn’t just about what happens in the US.  Our own oil happens to be exported to sites around the world.  So, the complex transportation of oil to and from countries across the globe also factor into the pricing.

And finally, don’t forget geopolitical risk.  Anytime a flare up of tensions in the Middle East occurs (such as what we’re seeing right now in Egypt), it tends to spike the price of crude (because of potential supply disruptions).

So perhaps the price of oil is justified after all?

Actually, I tend to think crude is overpriced most of the time.  And, the consistent high prices of black gold will just push us into alternate fuels that much faster. 

But more importantly, I wouldn’t bet on lower oil prices.  I believe there is a floor to how far oil can drop due to the demand and the geopolitical factors.  Fortunately, there’s a perfect way to trade this scenario using options… by selling puts.

If you believe in a floor in oil prices, then selling puts at key support levels is the way to go.  We may not be able to do anything about the overpriced nature of crude oil, but we may just be able to profit off it consistently by selling puts.

Yours in Profit,

Gordon Lewis

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Category: Breaking News

About the Author ()

Gordon Lewis is the Chief Investment Strategist and editor for the popular daily newsletter – Options Trading Research. He’s also editor of our dynamic theme-based options trading service, Advanced Options Adviser, and one of the key analysts behind the highly successful Options Trading Wire.