Price of Crude Oil Barrels Down 22% Since July 11 High
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If you think the market - aka Dow Jones Industrial Average - has been volatile, take a look at oil prices. Crude in New York closed down $5.69 or 4.4% to $114.59 a barrel on Friday, Aug.22. That decline took back a gain of $5.62 on Thursday to $121.18. Crude in now down 22% from its intra-day high of $147.27 a barrel on July 11, and the retail price of gasoline now averages $3.62 a gallon, according to AAA's Fuel Gauge Report released on Friday. That's down 10.3% from a high of $4.12 on July 17.
To put the swing in oil prices is perspective, such a move (approximately 5%) in the market would result in a down and up move of some 580 points in two days! That's enough to scare the pants off of most investors. As discussed last week, a rising dollar is the reason for oil's decline. On Friday the dollar was up more than 1% against the British pound and the Japanese yen and 0.5% against the euro.
The rising dollar is good news to Federal Reserve Chairman Ben Bernanke. He continues to believe the higher dollar will help commodity prices to ease later this year and early 2009. This will help moderate inflation, he conceded in his Jackson Hole speech, because the credit crunch that erupted when housing collapsed last summer is so strong. In his speech given earlier last week, Bernanke said "the financial storm that reached gale force some weeks before our last meeting here in Jackson Hole has not yet subsided, and its effects on the broader economy are becoming apparent in the form of softening economic activity and rising unemployment."
Bernanke said that as the central bank deals with the current turmoil, officials must also consider how to overhaul regulations to minimize the risk of future crises. He reiterated his endorsement of the Treasury getting power to resolve failing investment banks, and he signaled a need for a new, comprehensive supervision of risk.
Warren Buffet, for his part, said in a CNBC interview that the U.S. economic slowdown will extend into 2009 and be deeper than many people think.
A substantiation that the credit crunch continues, is the apparent need by Fannie Mae and Freddie Mac to seek addition capital so that these government- sponsored entities can, in turn, continue to supply the mortgage capital the nation's lenders require. They are trying to convince private-equity firms and other investors about the possibility of buying new common or preferred shares in their companies. But that effort is running up against what may be an insurmountable hurdle because many investors fear any money they invest now will be lost if the U.S. Treasury bails out the companies through a purchase of equity in them.
Shares in the companies have been hammered for weeks by fears they would no longer be able to function, a problem that would likely cripple the housing market. Last month, congress gave the Treasury Department the authority to lend money to the firms or take an equity stake. Because investors have little idea how Treasury would intervene, they have become less enthusiastic about adding Fannie or Freddie to their portfolios, thus creating a self-fulfilling spiral.
In any event, the rising dollar caused the Dow Jones Industrial Average to sprint up 197.85 points on Friday to close at 11, 628.85, and that's good!
In the meantime, be sure to keep you 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 or of www.mybaycity.com)509 Center Ave, Suite #102, Bay City, MI
(989) 892-5055
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