Crude oil dropped 4 percent on the day as investors got reports that oil stocks will remain high into the first quarter of next year. On the NYME January futures for oil fell to $63.05 a barrel or –4.2%. This is the lowest point in 5 years. Oil futures in London also fell at a similar pace. Analysts remain very bearish on crude oil as US drilling reports show large supply and the Japan economy continues to struggle.
Traders were hoping that the price declines would lead to less drilling rigs being established in the US but reports showed a continual increase in rigs. Meanwhile, Japan revised its GDP growth estimates lower and other countries were viewed to follow in the near future.
Morgan Stanley is estimating that Brent crude cold reach $43 a barrel by the second quarter of next year. Without OPEC reducing their output, supply should continue to grow for at least the next 6 months. Under a best case, supply and demand for oil could balance in the 2nd half of 2015.
A stronger US dollar makes oil more expense for countries to make purchases. This comes after a recent price cut by Saudi Arabia. At the end of the week, more reports will come from the US Energy Administration and OPEC to provide a clear picture of the oversupply.
A good way to lower your overall risk when investing cash in the US stock market or in US commodities is always to be diversified. This can be easily accomplished by using a range of companies including technology stocks to large blue chips (think IBM). Also put some of your hard earned US dollars into bonds in case there’s an uptick. The most effective way to rehearse diversification is usually to hold mutual funds including market index funds. ETFs provide a great way to purchase commodities without have the volatility of futures contracts. OIL is an ETF that matches the S&P GSCI Crude Oil prices. And there are four inverse oil ETFs to take a look at in this climate: SCO, DTO, SZO, and DWTI.
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