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Not Having Fun Yet

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The only party on Wall Street this Thanksgiving will be the bears as they celebrate their windfall profits from a nearly 50% sell off in the equity markets. The commodity markets have seen drops of more than 65% from the highs.

Crude oil closed under $50 on Thursday in New York as the December contract expired. It was not specifically an oil story taking the prices down but an imploding stock market on rising fears of a severe global recession. When panic hits the streets nothing is safe. The intraday low on crude was $48.64 and a level not seen since May 2005.

Analysts were competing with each other on who could make the direst predictions about the global recession and the potential for declining demand in China and India. Those emerging markets have been supporting world demand growth for not only petroleum but almost any consumable product.

Unemployment in the U.S. is rising sharply and lawmakers cannot come to terms on bailing out the big three automakers indirectly responsible for about three million jobs in the USA. Doesn't seem like a challenge to me with the hundreds of billions being handed out to every other institution circling the drain but lawmakers have garnered the spotlight on this one and they are milking it for everything they are worth. Meanwhile the markets are going down in flames. Reminds me of the saying "Nero fiddled while Rome burned." I don't know if that is true or not but U.S. lawmakers are definitely fiddling while trying to place the blame on somebody while the markets are imploding. Nice work guys!

Meanwhile there are events transpiring on the global stage that would have sent crude prices over $250 a barrel several months ago. The pirate who captured a Saudi Arabian oil tanker last week carrying two million barrels of oil are now demanding $25 million for its release. It is not likely to happen because that would only embolden dozens if not hundreds of copycat attacks and bring shipping to a standstill. Already shipping officials are talking about diverting tanker traffic away from Somalia and the Gulf of Aden and around the Cape of Good Hope. According to shippers that would add major costs and significantly lengthen transit time but it would still be preferable to having your ship and cargo captured and held for ransom. The capture of the Sirius Star has seriously hampered the current shipping picture and were it not for the current market implosion the price of oil would be rocketing higher.

The plunge in prices under $50 has brought the OPEC cast of characters back to the microphone. Two weeks ago they were going to cut production at the Nov-29th Cairo meeting. Last week they said they would hold off on new cuts at that meeting because the announced cuts for November had still not been enacted. Why announce more cuts when nobody obeyed the last announcement? Today OPEC members started claiming they would announce more cuts at the Cairo meeting. With demand and expected demand estimates falling so sharply they need to get their act together or be faced with $40 oil by the Nov-29th meeting.

Jim Brown

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