AFR in the News: Protect your investments from oil shocks

John Wasik: Protect your investments from oil shocks – John Wasik (Bloomberg)
February 27, 2012

“He’s back. The speculative trading beast is pushing up gasoline, diesel and heating oil prices, and scaring economy-watching investors in the process. There are a few defensive weapons to protect your portfolio. It’s time to unsheathe them.   Oil traders, producers, refiners and speculators, citing tensions in the Middle East that could cut supplies, have once again revived the monster. Crude prices hit a nine-month high recently to top $120 a barrel and gasoline has spiked by as much as 40 cents in some regions of the United States. The national average price of gas could hit $4 to $4.25 per gallon by April, according to Tom Kloza, chief oil analyst at Oil Price Information Service. The overall impact is felt everywhere. For every penny increase in the price of a gallon of gasoline, spending declines an estimated $1 billion throughout the United States, according to the energy research firm Cameron Hanover. At this point, that could kick the crutches out from under the wobbly U.S. economy. Wall Street and derivatives traders have taken to the courts to block new rules curbing speculation through ‘position limits,’ so prices remain free to go stratospheric again.… The last time we saw this speculative feeding frenzy was in 2008, when in July, amidst the meltdown in the credit and housing markets, speculators wildly ran up the price of crude oil to over $140 per barrel.  Was the steroidal price explosion in 2008 due to increased demand or a significant reduction in supply? Trading volume was nearly 15 times world oil demand that year, according to research compiled by Americans for Financial Reform. It was as if commodity traders had opened up a mammoth casino and all made the same wager, constantly outbidding each other in a time of turmoil. ‘The only short-term solution,’ says Tyson Slocum, director of Public Citizen‘s energy program, is to “rein in speculation.” He notes that due to increasing global demand for oil and the difficulty in accessing crude cheaply, ‘addressing speculation won’t get us back to $2.50 a gallon, but it may shave 50 cents a gallon off current prices.’” Click here for more.