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The End of the Oil Age

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Oil inventories produced a huge surprise on Wednesday morning with a drop of 5.3 million barrels when analysts were expecting a build of +900,000. The drop came from increased refinery utilization, rising to 87.9% and from a drop in imports of 700,000 bpd. The unexpected news produced a monster spike in oil prices to a session high of $133.33.

Our USO short was stopped out at the open for $4.40 and a loss of $1.10. That is far less than the pain being felt by those short crude futures when the inventory report was released. 

$133 oil weighed on the markets as more and more analysts raised their estimates for oil prices for later this year. SocGen raised their 2008 average estimate to $115 from $101 and Credit Suisse to $120 from $91. Those pale in comparison to the second half estimate of  $141 from Goldman Sachs.

Oil prices are up +30% in 2008 alone and it has finally reached a point where it can't be ignored. Those analysts calling for a return to $70 oil are looking pretty stupid today. The oil supply problem is finally getting the scrutiny it deserves and the details are not pretty.

Energy secretary Sam Bodman said there was nothing the government could do to ease the pain of soaring fuel prices and added that a rise in speculative investment in commodities was not behind the rally. "We have flat oil production …and increasing demand. I don't think anything can be done near-term."

Tanker tracker PetroLogistics said OPEC's oil output in May had risen by 700,000 bpd compared to April. Saudi Arabia announced last week that they were increasing production by 300,000 bpd but they neglected to say it was in sour crude and not light sweet crude. They could increase production by a million barrels a day in sour crude and it would have no impact on prices.

American Airlines said on Wednesday it was cutting domestic capacity by 12% in Q4 and will layoff thousands of workers. American will retire at least 75 aircraft including MD80s and A300s. American had previously announced a cut in mainline Q4 capacity of 4.6%.  That is in addition to the 12% cut announced today. In an effort to stop the bleeding American said it would charge a $15 fee for the first checked bag on anyone but full fare customers and raised the fee for oversized bags to $50. American said it had participated in 15 fare increases in 2008.

With crude prices exploding the airline sector is dying. No airline can absorb $130-$150 oil prices and continue to conduct business as usual. The price of air travel is going to double or triple over the next 24 months and the number of Americans traveling is going to drop substantially. We will eventually end up with 2-3 national carriers with large government subsidies. By 2015 there may be only one U.S. airline and that will be government run.

Times are changing as I have been predicting for the last 4 years. As these signs come to pass I hope my readers finally accept the grim reality that life as we knew it is gone forever. I have warned repeatedly that gasoline will become unaffordable and everything related to daily transportation would change drastically. With gasoline now at $4 and diesel at $4.75 has that impacted your travel plans? How will $8 or even $10 gasoline impact them in 2010? In order to survive the coming oil crash you need to start planning now. What we have seen to date is just a small preview of what is to come.

Jim Brown

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