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No End In Sight

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Despite the Dow's triple digit gain on Thursday the Asian markets dropped sharply once again. The Nikkei was down -6.5%, the Topix was off -5.3% and the Hang Seng dipped -4.8% and at one point nearly moved below 13,000 for the first time since Oct-2004.

Oil prices rose slightly to $67.84 gaining $1.09 per barrel. Those numbers do not show any concern over the impending OPEC production cut meeting on Friday. Iran is asking for a two million barrel per day cut while Qatar is asking for at least one million. Analysts polled by Reuters anticipate the cartel will cut by 1.0-1.5 mbpd. Because of the growing recession fears OPEC could surprise the markets with an even bigger cut. They have already warned they are going to take future economic possibilities into account along with the current build in crude inventories.

The slight bounce in oil prices helped boost energy stocks back into positive territory after Wednesday's sharp declines. Dow component Exxon rebounded nearly $6 and helped pushed the Dow to a +172 point gain. Chevron, also a Dow component rose +8% or $5.00. The Dow's rebound was not enough to support the Asian markets and poor earnings results from some high profile companies soured investor sentiment.

The U.S. crude inventory report on Wednesday showed a build of +3.2 million barrels and was the fourth week of builds totaling a gain of 21.2 million barrels since ports and pipelines reopened after Hurricane Ike. Gasoline stocks also rose again with a +2.7 million barrel gain.

Crude prices on Friday are going to depend a lot on the post meeting comments coming out of OPEC and how well the sound bites are believed by traders. If there are conflicting statements by the various oil ministers then traders could ignore the proposed cuts until they actually see evidence they have happened.

Remember the majority of the selling has not been on fundamentals but on forced selling by funds. That has nothing to do with OPEC, new wells, falling demand or a potential recession.

Next week the U.S. Federal reserve meets on Tuesday and Wednesday and is expected to cut rates by another 50 basis points. This should be seen as conducive to softening the recession and increasing oil demand.

On November 12th the IEA will release their annual World Oil Outlook report and the rumor for months has been a drastic drop in expected long-term production. If this report is bearish as most believe it could generate excitement in the energy sector once again even though this is a long-term report. There is lots of news in the energy sector over the next two weeks so it is possible we could see a new uptrend begin.

Jim Brown

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