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New 22-Month Low For Crude

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Crude prices collapsed to trade at $55 on Wednesday despite a gloomy report from the IEA on future global supplies. OPEC countries immediately started talking about another emergency meeting before December.

Wednesday could not have been much worse for the energy sector. The price of oil collapsed along with the broader market to hit lows not seen for crude in nearly two years. Fears of an accelerating global recession were brought to the forefront when Best Buy Stores (BBY) warned of a "rapid, seismic change in consumer behavior." Best Buy warned that an already grim outlook for the worst holiday season in decades might be getting even worse.

CEO Brad Anderson said the rapid changes in consumer behavior have created the most difficult climate we have ever seen. Best Buy predicted sales of $43.7 billion to $45.5 billion and a -1% decline in same store sales. Analysts were expecting sales of $46.2 billion. The Best Buy warning followed a bankruptcy by their largest rival, Circuit City. Best Buy said were it not for the added business they expected to get from customers afraid to make major purchases from a company in bankruptcy their holiday sales would have been worse. Best Buy same store sales fell -7.6% in October and the company said they could see a drop of -15% between November and February.

After the markets closed on Wednesday Intel slashed its fourth quarter outlook and lowered its sales forecasts by more than $1 billion. Intel said businesses were cutting back sharply on spending in the current environment. Intel said it was seeing sharply lower PC demand in all segments and all geographies. Last week we saw Cisco report that orders fell off abruptly in October as well. Lenovo, the fourth largest computer maker said profits fell -78% on slowing sales.

The major consumer warning from Best Buy echoed similar warnings from other retailers for the coming holiday season and Intel's warning was confirmation of a slowing tech market. This is putting investors on alert that global conditions are deteriorating rapidly and could easily produce the worst global recession seen in decades. In a severe global recession the consumption of gasoline and other crude products would decline sharply. These fears caused another major decline in the price of crude.

Traders were afraid that the U.S. government inventory report on Thursday would show a sharp increase in crude oil levels. The EIA said demand in the U.S. was expected to fall by more than one million barrels per day. That would be the first decline since 1980. The IEA was also expected to lower their demand forecast on Thursday. China's GDP fell to 8.2% and the lowest level since Oct-2001 as export demand dropped sharply.

Iran said it would support another emergency OPEC meeting and a further production cut of one million barrels per day. OPEC's president said the cartel could meet as early as Nov-29th in Cairo if prices don't firm soon. Wednesday's crude price at $55 is a disaster for OPEC and I would expect that meeting date to become firm if prices do not rebound by Friday's close.

Jim Brown

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