Oil ETFs: What if the Dollar Strengthens

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Enter a more stable U.S. dollar, or even a strengthening dollar. Now the only thing to keep egging the oil boom on in the near-term is the desire of speculators to make money on the long side.

It's no secret that surging oil prices are hammering consumers. It's also contributing to higher living expenses, also known as "inflation."

In Fed Chairman Bernanke's speech in Spain this week, he sent a strong message to the world that the Fed would be shifting its focus to rising prices for food and energy. Put another way, the Fed's finished lowering interest rates to ward off a housing-induced recession; rather, it will look to keep the economy stable by monitoring the increasing costs of living.

It is doubtful that the Fed can directly reduce the supply and demand of commodities like food, metals and oil; that said, stabilizing interest rates increases faith in the U.S. dollar...

However, oil has risen yet another 10% since April 30. This suggests that, while there is a relationship between the price of oil and the dollar, it is not the only relationship. Speculation vis-a-vis Goldman's $200 barrel call and Pickens' $150 call plays a part. What's more, genuine supply and demand have played a huge role in the run from $40-$50 to $135+.

Steve Liesman of CNBC recently pointed the supply-and-demand fact out with a statistic that showed the price of oil doubling in places like Europe, as it has tripled in the U.S. Of course, that's when Rick Santelli of CNBC counter-punched, pointing out that a 200% rise in parts of Europe compared to a 300% rise domestically suggests roughly a third of oil's rise may be dollar-induced.

Clearly, there is a relationship between the value of the U.S. dollar and oil prices. Worldwide, crude has been priced in U.S. Dollars for 3 1/2 decades. So when the dollar falls, oil prices rise via a phenomenon that many dub, "petrodollar inflation."...

Enter a more stable U.S. dollar, or even a strengthening dollar. Now the only thing to keep egging the oil boom on in the near-term is the desire of speculators to make money on the long side....

In the near-term, however, one should be prepared for the possibility of a dramatic pullback. With magazine covers like The Economist featuring a picture of a stamped barrel ($135), and with CNBC putting a special ticker of crude in the lower-hand corner of its screen for 24/7 viewing, one is reminded of Nasdaq coverage in 1999...

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