An Amazing Past And Historic Week

Wowsers! What else can you say about this amazing past week?

I am sure you have all read about Freddie Mac (FRE), Fannie Mae (FNM), Lehman Brothers Inc., Merrill Lynch & Co., Inc., American International Group, Inc. (AIG), whacko rules against short selling certain financial stocks, $700 billion bailout package, and probably several other newsworthy events that I have missed. I wish I had something meaningful or insightful to add to the recent developments.

If you want an excellent primer on the developments that led to the current crisis, I urge you to read Bill Fleckenstein's book: Greenspan's Bubbles: The Age of Ignorance at the Federal Reserve.

Like most people, I am overwhelmed by the severity of the financial crisis. For the most part, I have been sitting and observing. I did, however, get longer some oil related securities, which have enjoyed a nice rebound.

My decision to get longer on oil was based on recent low oil prices of less than $100 per barrel with a shallow drop in consumption in the United States. Oil consumption has only fallen by about three percent. Please see Energy Information Administration – Short-Term Energy Outlook quote below. While three percent at the margin is a large amount, a three percent reduction in consumption is not large for oil. Almost all oil fields have decline rates in excess of three percent. That means, most oil wells will be producing at least three percent less oil next year.

Consumption. Total U.S. petroleum and other liquids consumption is projected to decline by 610,000 bbl/d, or about 3 percent, in 2008 based on prospects for a weaker economy and high crude oil and product prices continuing into 2009 (U.S. Petroleum Products Consumption Growth). Preliminary July and August 2008 weekly survey data indicate that year-over-year declines in total consumption, which began in August 2007, have narrowed since earlier this year. During the first 6 months of 2008, total petroleum consumption fell by an average of 930,000 bbl/d compared with consumption during the same period in 2007. During July and August, the year-over-year declines averaged 660,000 bbl/d. For the rest of the year (September through December), the year-to-year decline in consumption is projected to narrow to an average of about 130,000 bbl/d.

Many people believe that the commodity bull run, especially in oil, is over. I am not one of those. Most major oil fields are aging and will produce less oil next year. The world economy will continue to grow and demand more oil. Thus, I believe we are experiencing a lull in oil prices. Looking at the Bloomberg site, I see the latest WTI price was $104.55. While some might hope or believe that oil prices will be sustained at a much lower levels, I continue to believe that oil prices will continue to trend higher. That is not to say prices cannot or will not dip, even for months at a time. Rather, unless we suddenly find a new energy source or are able to change our habits in a dramatic fashion, the demand is likely to grow faster than the supply.

This coming week promises to be an exciting week as the markets digest and react to the government bailout. Will there be more surpises? Will volatility increase or subside? The answers to the last two questions are likely yes and yes.

My photograph of Angel Glacier, located in Jasper National Park, is hosted at Flickr. If you click on the picture, you will be taken to my Flickr account where you can see more pictures.