Word of the Day

Commodity

Even if you don't think you do, you already know plenty about commodities. Want us to prove it? No problem.

What makes oil produced in Saudi Arabia different from oil exported from Nigeria? It's the same thing that makes the corn you ate at last summer¿s barbecue different from the corn used to produce ethanol. Stumped? Well, don't feel bad, it's a trick question. The answer? Absolutely nothing. Corn is corn no matter where it comes from -- just as wheat is wheat and natural gas is -- right! -- natural gas. (Though the quality may differ, the make-up is uniform.)

So, in less elaborate terms, corn and oil (and all other commodities) are homogenous goods that can be processed, resold and more often than not, used as an input to the production of other goods or services. These goods are traded on a commodity exchange, thus setting the price-per-barrel (or other metric unit) used to value them.

Now pay attention, here's a question that indeed does have an answer: What is the difference between a commodity and a stock? While a stock can tank and become worthless, a commodity cannot have its value be wiped to zero. One other difference: Most commodities are traded in futures, meaning traders buy and sell where they think the price of a product will be at a certain point in the future. Stocks trade based on the value of the underlying company at that point in time.

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Friday, June 06, 2008

Oil's Historic Day Sends Dow Spiraling Downward

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FOXBusiness

Crude oil easily broke the record for the largest one-time gain and the all-time record close when it settled at $138.54 on Friday. That marks a gain of 8.4%, or $10.74.

The previous all-time record close of $133.17 was set on May 21 while the largest one-time gain was set on Thursday when oil surged $5.49.

Crude’s surge was so sharp that trading was temporarily halted Friday afternoon for all oil-related commodities after they hit their daily limit for trading on the New York Mercantile Exchange.

Heating oil finished up 29 cents to $3.97 a gallon, which marks an 8% gain on the day, while gasoline settled up 6.35% or 21 cents to $3.546 a gallon.

Crude oil peaked at $139.01 a barrel on Friday afternoon, an increase of $11.22 after opening the day at $127.79.

The price jump came as traders buzzed about an analyst predicting oil would hit $150 by next month, a drop in the U.S dollar and a threat of a potential air strike in Iran.

Ole Slorer, a Morgan Stanley analyst, forecasted crude could hit $150 by July 4, due to increasing demand in Asia. This combined with a weakening dollar may have encouraged overseas traders to seek a hedge against the falling dollar.

A day after the European Central Bank made comments that hurt the greenback, the dollar fell further on Friday as a result of weak labor data. The U.S. Department of Labor released a report showing the unemployment rate increased from 5.0% to 5.5% last month, the biggest monthly increase since 1986.

Phil Flynn, FOX Business contributor and energy analyst at Alaron Trading cited the data, the dollar, and geopolitical concerns.

“You put it all together it was a prefect storm to drive these prices,” Flynn said. “Traders down here never saw anything like it and they may never see anything like that again.”

Nigeria's Oil Minister Odein Ajumogobia told Reuters that OPEC is ready to jump in and help to slow rapidly rising oil prices, but it does not see any reason to immediately increase supply. Ajumogobia insists the weak dollar and fear of a supply gap were the driver in today’s spike, according to Reuters.