Is All The Negative Information Behind Us? What About Oil?
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It would seem the market has fully digested all the fall-out started by defaults on subprime loans. The resulting credit crunch and write-downs by major financial institutions sure created a roller coaster ride in the market place over the last year. It may not be over. To be sure, it is never OVER.
However, with its gain of 42.91 points on Friday, the Dow Jones Industrial Average stands at 12891.86, which is 1,000 points above its recent low reached in early March. This is a remarkable performance when you consider all the negative forces in the economy, led by the afore- mentioned credit crunch. Friday's move was also in the face of the University of Michigan's report on consumer sentiment. The U of M's index fell in April to its lowest level since the 1982 recession.
So now the media will have to move its attention on to some other major negative in the economy. And right there to take the spot light is -- OIL! And at $120 a barrel this is a serious matter. The pain the high price of oil brings is being felt by every soul in the population. It is not relegated to just a few or a particular sector of the economy.
Oil settled Friday at $118.52 a barrel on the New York Mercantile Exchange, up 2.1% or $2.46 for the day on fresh tension between the U.S. and Iran. We are paying an average of $3.51 a gallon for self-service regular gasoline, up 15% this year. Prices are expected to rise, perhaps over $4 a gallon, in coming months. YIKES!
You have to keep oil and gasoline separate. The companies that make gasoline aren't enjoying oil's rise either. The refining margin, or profit that refiners make from transforming crude into gasoline and other fuels, has shrunk in recent months. Valero Energy Corp., the largest refiner in North America in terms of capacity, has seen its share price decline 26% this year. The refiners apparently are not able to simply pass through the increase in oil's price to the consumer.
Some have speculated that a barrel of crude could go as high as $180. That would take the cost of gasoline somewhere north of $5.50 a gallon. That, experts say, would send global consumption tumbling and oil prices in retreat, as drivers would scramble to find ways to conserve. Of course, experts once thought $3 a gallon gasoline would lead to a drop in consumption. The latest forecast from the International Energy Agency says that global consumption will be up 1.3 million barrels a day from 2007. That would take it to 87.2 million barrels a day.
There are a lot of new automobile drivers today, in places like Moscow, Shanghai and Tehran that are accountable for much of the increase in demand for oil. The price of oil is also affected by the decline in oil reserves in the older fields such as the North Sea, Mexico and western Siberia. The costs of production have increased substantially and some of the new fields are hundreds of miles from anywhere, making it more expensive to get workers and equipment to the fields and the oil from the fields to market.
These problems are not likely to resolve themselves quickly. What is most likely is that consumers will cut down on unnecessary travel, find ways to work without travel, combine with others to travel, or invent new ways altogether. Meanwhile, you can expect to read and hear a lot about the price of oil in the coming days as it replaces the credit crunch in the spot light.
So remember to keep your risk within your tolerance and keep ahead of inflation.
I invite your questions.
Or Contact Jerry Cole at:
509 Center Ave, Suite #102, Bay City, MI
(989) 892-5055
(The opinions expressed are solely those of the author and not Gen worth Financial Securities Corporation.)509 Center Ave, Suite #102, Bay City, MI
(989) 892-5055
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