The financial markets have been running hot in 2012 with an improvement in US economic growth and tensions in the Middle East causing oil prices to push to their highest level in over six months.
How much? Oil prices have seen a massive move higher with a barrel of the most commonly traded type of oil – the West Texas Intermediate – jumping almost 40 per cent in just six months.
But don’t think that this is as far as the ‘black gold’ (as it is sometimes known) can go. We are still more than US$40 per barrel below the all-time highs at $150 per barrel – and many analysts believe it could go much further than even those lofty heights.
One of the key reasons for the push higher in oil has been the recent strength of the US economy. The US is, by far, the world’s largest consumer of crude oil.
Over the last 12 months, we have seen a strong improvement in the US economy. This has been particularly noticeable in the US jobs market, with a large number of new jobs being created over the last 12 months.
The improvement in the US economy has also been seen in the recent gains in the US sharemarket.
So far this year, we have seen the Dow Jones sharemarket index move to near four-year highs, while the technology-focused Nasdaqindex has been trading at its highest level since the tech boom inback in 2001!
Another reason for the strength in oil prices has been the tensions in Iran.
The Iranian government has become increasingly belligerent in 2012 with the country warning that it would blockade the Strait of Hormuz.
The Strait of Hormuz is one of the most important thoroughfares is the world. Over 35 per cent of the world’s seaborne oil is transported through this area or 20% of all oil! So, as you can imagine, if Iran makes good on its threat, then oil will become much harder to supply – and therefore oil prices will move much higher.
These tensions have caused the crude oil price to skyrocket from US$80 per barrel in August to more than US$108 per barrel in February!
How high can it go?
So, how do you trade it?
Many analysts say the best way to trade a runaway market like the crude oil market is to pursue a strategy known as “buying the break”.
Buying the break is a strategy you follow when markets are surging higher. You can do this by waiting for markets to make a new high and buying when the market achieves these new levels.
By doing this, you allow the market to provide confirmation of the strength of the move by trading at new highs. If the market doesn’t reach new highs, you don’t commit yourself to the position.
But if the oil market is going back to US$150 per barrel, it will have to make new highs at US$110 first – and that’s how “buying on the break” works.
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