Institutional investor trade of the quarter: Buy oil, sell the dollar

Posted Jun 17th 2009 5:50PM by Joseph Lazzaro
Filed under: International Markets, Other Issues, Commodities, Oil

What's the current, sexy trade by institutional investors? Buy oil, sell the dollar.

For market absolutists and conservative economists, this is an 'np' -- or nooo problem. Like oil? Knock yourself out, and buy away. Oil's sexiness, due to expected increases in oil demand as the U.S. and global economies recovery, is a major reason crude's price has increased about 100% in six months. Oil closed Wednesday up 56 cents to $71.01 per barrel.

The free market, or 'wag the dog'?

In other words, oil's price move is just an example of the free market in action. We want the free flow of capital. We want price discovery. We want the more-efficient deployment of resources. Investment, mutual, and hedge funds are intrinsic to this process.

A problem occurs, however, when institutional investors push prices up so high -- and well beyond what fundamentals would dictate -- that it decreases both consumer spending and business investment, hurting the economic recovery. That type of market circumstance, as a colleague and friend, economist Peter Dawson, has outlined, is both absurd and irrational, capable of producing conditions more akin to 'The Twilight Zone.' In other words, oil prices could go so high via futures buying that the buying will have the affect of eliminating the very economic recovery that prompted the oil futures buying in the first place. And that type of market behavior, when you think about it, makes no sense, from an economic development standpoint, Dawson argues.

And that's the view from here as well.

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Financial Editor Joseph Lazzaro is based in New York.

Tags: dollar, oil prices

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Reader Comments (Page 1 of 1)

6-17-2009 @ 8:12PM

chedar888 said...

This article tells all about how to handle the oil price surge slowly otherwise the institutional investor is going to heard themselves from being too greedy without. Tell these institutional investor to be realistic by coming down to see for themselves the California highway is practically empty during the rush hours. That will scare them to think twice that recovery is still not here. So if they want to loose money, do what they did last time by artificially inflacting the price of crude oil to $147 without thingking that people here are loosing their job left and right.