Rule of Thumb #1: Every 1 cent rise in the price of gasoline sucks a billion dollars worth of spending power from other areas of the economy. That's because rising oil prices are a consumption tax. See below for more.
Rule of Thumb #2: An increase of $10 in the international (Brent) price of oil tends to lead to an increase of 25 cents in the price of gas. This is because America still imports much of its oil, so that's what sets the price at the pump. The rule also states that if you divided the price of oil by 40 and then added 75 cents you’d get pretty close to the national average price of gasoline.
To give you real-life examples, if the Brent Crude international oil benchmark price hits $120, America's national average price of gas will be around $3.75 (that is, $120/40 + $0.75). If Brent crude falls to $100 a barrel, it’s a good guess that gas will head toward $3.25.
Rule of Thumb #3: Every $10 rise in the price of oil cuts 0.2% from GDP growth. Rising energy prices are essentially a consumption tax. All that money we spend at the pump gets diverted from other spending.
Rule of Thumb #4: A change in oil prices will lead to a change 1/10th as large to the Consumer Price Index
With those four rules of thumb in mind, let me share with ou two more pieces of hard-earned wisdom:
When All Speculators Are Bullish, The Easiest Path for Oil Is Down
A piece of Trader Dan's comment on that chart: while the big commercial category is not at a record net short length, they are not far from one. The difference in the short positioning in this market at the current time, compared to when the commercials held their record net short position during August 2013, is that back then, the SWAP DEALERS were actually on the net long side of the market as well. Now those Swap Dealers are net short as well. As a matter of fact, the only category of traders that was net short the crude oil market back then, was those commercials - everyone else, including the swap dealers, was net long.
Crude Oil was just shy of $112/barrel at that time. It then promptly proceeded to collapse some $20 barrel in the matter of three month's time all the way to $92.
Read the rest from Trader Dan himself.
That said, trying to pick a top in any market can be very expensive. Why? I'll tell you why ...
Market Trends Can Last Longer Than You Believe Is Possible. What's more, bullish moves generally last longer than bearish moves.