Thursday, May 5, 2011

Financial Markets: A Reason to Cheer

Today was a good day on the global financial markets. The price of oil crashed. The price of the commodity plunged today nearly 9 percent and settled below $100 per barrel.

It looks like the bubble on the oil market is now bursting. The oil price rally of the last months was just the outcome of a herding effect. The high inventories in the USA show that there is no shortage.

Hedge funds and other speculators bought the important commodity just because the price of oil was rising. Therefore they hoped they could sell oil for a higher price. This speculation drove the price of oil even higher and caused a snowball effect, a self-fulfilling prophecy.

This behavior got more and more dangerous, because consumers and companies have to react to rising energy expenses, especially for gas, and therefore cut their expenditures for other things. When the consumers have to pay higher gas prices they have to reduce their purchases for other goods. Therefore the oil price rally threatened to stall rising consumer demand, the motor of the whole economy.

The oil crash today could be the beginning of a relief.

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