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Look Out Below

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For several weeks now oil prices have been stuck in a range and failed to rally on several high profile news events. Hurricane Gustav caused prices to jump to $118.25 when it suddenly blew past Cuba as a category 4 storm and headed directly for New Orleans. Mayor Ray Nagin called it the storm of the century.

The mayor was wrong about the storm and by all estimates this morning the damage to the gulf oil facilities was minimal. Nobody will know for sure but the radio beacons are still beeping and right where they should be. That suggests the big rigs were not blown off their moorings and can resume operations very quickly.

That was bad news for traders who bought the bounce thinking a week's shutdown of production and imports would send prices higher. The relatively peaceful passage of the storm has attracted a lot of bears.

The price of crude has plunged overnight to $106 and a four-month low. With the OPEC meeting in seven days I would think this is a buying opportunity but I would wait for the bounce rather than try to catch the falling knife. The 200-day average at $109.60 was expected to be strong support. Evidently nobody told the bears. The next obvious support level is now $100 and only $6 away. Crude futures are down -$8.72 as I write this at 4:AM on Tuesday. If that holds it would be the worst dollar drop ever for crude. Natural gas is also imploding and down to $7.41 and well under that $8 support level.

S&P futures are soaring on the drop in crude. It should be an exciting day in the markets and you can bet the volatility will be huge.

Jim Brown

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