The risk factors surrounding the nation’s oil industry are through the roof. The action is costing unprepared investors a lot of money. For proof, ask Delta Petroleum (NYSE:DPTR) shareholders.

Even a first grader can look at this market and know anything but fundamentals are driving the action. Fortunately for guys like me, few grade-school can figure out why.

These days, it is all about the macro-economy. More specifically, the only thing anybody cares about is the value of the dollar. When the greenback is up, the market is down (like today). When the dollar is weak, the market rallies – like last week.

There are several reasons for the trend: flight to safety, inflation, political risk… you name it.

What matters for us as traders is the pattern is unwaveringly true for the crude markets. With oil settlement denominated in dollars, the ever-important energy source is tied directly to the greenback.

The correlation makes oil a great hedge against the dollar, even better than the politically critical gold markets (few entities can dump billions of dollars of oil reserves into the market like the IMF may do).

Unfortunately, today’s strength in the dollar has sent crude prices back below the critical $70 level. As I write, a barrel is trading at $69.14, down $2.90 on the day.

That is not good news for industry giants like Exxon Mobil (NYSE:XOM), BP (NYSE:BP) and Chevron (NYSE:CVX), which all gapped down at the day’s opening bell.

Could be worse

While a small drop in Big Oil valuations erases billions in paper wealth, their shareholders are not feeling nearly the level of pain as the folks unlucky enough to be long on Delta Petroleum (NYSE:DPTR).

The stock is down 43% on news its Columbia River Basin test well performed far below expectations. While some gas was pumped, the company has deemed the level s “uneconomic.”

While the action has little to do with the value of the dollar or even commodity prices, the nasty decline goes a long way in showing the increasing levels of volatility in the nation’s energy industry.

As political, currency and economic risk swirl into a virtual perfect storm fueled by speculation, we are going to see larger and larger swings in the oil and natural gas industry. For some investors, it is exactly what they were hoping for. But for others, it will be a costly trap.

The folks with the most to win are options traders. Over at TFN Strategic Trader, we have used the increased volatility to our great advantage. Last Thursday, we locked in gains of 40% on a set of Chesapeake Energy call options.

Even better, the portfolio currently boasts a Big Oil short position and a dandy covered call already worth double-digit gains. Increased volatility will be a boon for options traders.

But for speculative investors looking to play the global economic rebound by grabbing shares of small-cap producers on the cheap, I have just three words… do your homework. If the dollar gets much weaker, the industry is going to start looking very different.

I am a huge fan of the commodities market, especially with China on a buying spree, but oil industry investors have a few more risk factors to handle.

Fail to understand how they all work together and you could have serious trouble on your hands. But get it right and make the smart moves, well, the rest of this year is going to treat you very well.

Keep your eye on that dollar.

Source: Oil Investors: Keep Your Eye on That Dollar