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Lost In The Financial Storm

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Did you miss it? A $6.00 rise in the price of crude oil would have been front-page news. Oil's post-market rally from yesterday continued into Wednesday's session and oil rose $6.01 to $97.16 a barrel. This was the second largest one-day surge on record. Yet the move got lost in the financial storm as the media continued its morbid fascination with the imploding financial sector.

The headline story today was the Federal Reserve's move to loan American International Group (AIG) up to $85 billion to prevent the insurance titan from filing bankruptcy. The government will crank its printing presses into overdrive to provide the money and this sent the U.S. dollar sliding lower.

The combination of a falling dollar, a widespread flight to safety to anything but stocks and a worse than expected inventory report pushed crude oil to $97 a barrel. It's tough to call oil a "safe haven" after an eight-week sell-off that saw oil fall almost 40% from its highs but more than one analyst was suggesting that it may be time to get bullish on oil again.

The weekly inventory report had a hand in oil's big gain. Oil inventories fell 6.3 million barrels versus analysts' estimates for a decline of 3.7 million barrels. Gasoline inventories also came in lower. This morning's report showed gasoline inventories falling 3.3 million barrels to 184.6 million barrels, which is the lowest level on record once supply data became available in 1990. We can expect it to get worse before it improves. Today's report did not fully account for Hurricane Ike and its impact on the refiners.

Energy stocks were actually bucking the trend early this afternoon. Both the OIX oil index and OSX oil services index were in the green before rolling over as the broader market accelerated its losses in the last hour of trading. Goldman Sachs reiterated their bullish call on oil and stated that prices had over corrected to the downside. The Wall Street firm did lower their three-month forecast on crude oil from $149 to $115 and their six-month forecast to $125.

The U.S. Congress made the headlines after passing a bill that allows offshore drilling. Depending on where you stand today's bill may have been a desperate attempt to push something forward before the September 30th deadline comes to pass. The current ban on offshore drilling is set to expire at the end of the month and companies will be allowed to drill up to three miles off the coast. The bill passed by Congress today forbids drilling within 100 miles from the coast unless companies get state approval to drill between 50 and 100 miles out.

Opponents of the bill consider it a joke. Studies have shown that approximately 85 percent of known offshore oil reserves are within 50 miles of the shoreline. This piece of legislation now moves to the Senate where it will compete with three additional bills all trying to sculpt future offshore drilling policy.

Jim Brown


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