Novice Investing - Interest Rate and Oil

Date: Monday 01st 2008f December 2008 05:40:44 PM

Interest Rate and Oil - 06/06/2006

By: Novice Investing Staff

Everybody is jumping into oils and energy these days. That is understandable considering that it has made a great run up for the past several years. Similarly, shares of many oil and gas companies have been doubling and tripling since the decade began. Now, that was then. But how about next year?

With oil price recently topping $ 70 per barrel, it is tempting to add these sectors into your core portfolio. But things may change quickly. For once, since 2004, the US federal reserve had been actively raising interest rate from a low 1% to 5.% now. And they signal that they are not going to stop at 5%. Why does this 4% difference matter? It matters because that is what all investors around the world is looking at. If you only get 1% holding the greenback, well then, you might as well buy other currencies or commodities ie: gold, oil, copper. This is partly the reason why the dollar was rebounding during 2005. That was the period where interest rate moves up quite a bit from a super low rate of 1 %. Who would want to save with 1% interest anyway?

Figuring out interest rate is quite simple. However, you do not know about the oil price direction, you say. Yes, admittedly, oil price is more difficult to predict, tick by tick. But, as we have pointed out, the federal reserve has recognized this as a form of inflation. It feels that it needs to raise interest rate further to quell this inflation threat. Like it or not, higher interest rate will slow economic growth and done excessively, it will cause recession.

Either way, it will reduce economic demand, and ultimately oil price. At the very least, it should hold oil price right there. Therefore, while investing in select oil companies may make a good investing sense, you probably will not see the outsized gains that it saw during the past few years. At this point, the higher energy price has already increased gasoline inventory in the US. If demand did not pick up (which they won't), then oil price may still have more rooms to the downside.

Yes, it does sound simplistic. But it has its merits. Why don't we go and watch it for the next twelve months?

END

You can view other helpful commentary by clicking here

Distributing your own investing content is easy. Simply, click here.

Disclaimer: The sole purpose of this article is educational. This article is merely the opinion of the writer and is not in any way a buy/sell recommendation regarding any securities.

[Resources] [Forum] [Link Partner ] [Novice Investing Directory ] [ Submit Your Article Here ]