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Slowdown Fears Maul the Market

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A sharp decline in crude oil prices took a back seat to an even sharper sell-off in global equity markets on Monday. Last Friday's sell-off in the U.S. markets fueled another wave of fear and selling across foreign exchanges. Europe was hit especially hard as the American financial crisis spreads across the EU. The London FTSE 100 index marked its biggest one-day point loss ever falling more than 391 points, -7.8%, to levels not seen in more than four years. The pan-European index also dropped more than 7%, a decline that overshadows the post-9/11 drop of 6.3%.

The media pointed their finger at concerns over a worldwide slowdown as the main culprit behind Monday's market carnage. The Dow Jones Industrial Average lost more than 800 points at its worst levels of the session. It was the venerable index's biggest intraday point drop on record. The price of oil followed the trend in the S&P 500 on Monday, except the late day rebound in oil wasn't quite as strong as it was for stocks. Crude oil futures closed down more than $6 on Monday to settle under $88 a barrel. This was the lowest price in eight months.

Investors big and small continue to liquidate anything of value and the term "panic selling" was tossed around by several market pundits and reporters. The consensus is that a recession in the U.S. and abroad will cut demand for oil and fuel. This idea was bolstered again by French bank Societe Generale SA on Tuesday morning who lowered their global consumption figures and cut their oil price estimates. Societe Generale now expects fourth-quarter 2008 oil futures to trade around $105 a barrel and 2009 to trade around $114.

Iraq made the news again. This time it wasn't war stories but news on the country's plans for its future oil production. Iraq plans to start the first round of bidding open to international oil companies on six oil fields with estimated oil reserves of 43 billion barrels. Once the bidding process is complete Iraq will do it all again on another stable of oil fields expected to hold more than 51 billion barrels. All development will be done through a join venture between the international companies and one of Iraq's state run oil companies with the state controlling a 51% stake.

On the topic of state run oil companies, Mexico's Pemex just announced the closure of several wells in the Gulf of Mexico and the evacuation of four offshore plants. Tropical Storm Marco has formed quickly off the coast and could reach hurricane strength by Tuesday morning. The storm is in the southern section of the Gulf of Mexico and poses no threat to U.S. oil platforms in the Gulf.

In early summer news of a hurricane forcing evacuations and well closures, even in southern Mexico, would have sent oil surging higher. Today this type of news is completely ignored. A good question to ask is how much further will oil fall? At what point will a slow down in demand be priced into the price of oil? The $86-85 zone has been significant support in the past and it would be easy to see oil find a trading range in the $85-100 zone. As of Tuesday morning it looks like investors are starting to buy the dip. After a four-day losing streak oil futures are currently up about 2% to $89.75 a barrel. If this is anything more than an oversold bounce is anyone's guess.

Jim Brown

OptionInvestor.com

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