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Plans, Plans and More Plans

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Plans, Plans and More Plans

It seems every country was active this weekend in coming up with a bailout plan for the financial crisis. Hundreds of billions of dollars are going to be spent around the globe to beef up the banking system. The numbers are staggering. However, even more staggering is the change in the U.S. focus away from the already approved $700 billion plan to a different scheme to prop up banks by taking an equity stake in any bank with problems and thereby guaranteeing their loans. The administration is already under heavy criticism for wasting three weeks getting the old plan approved and it has already been tossed aside.

The competing bailout plans around the globe gave a small bounce to oil prices to $81 late Sunday night but the big bounce was in the equity futures. The Dow futures were up over 350 points at 2:15 ET. If the equity market likes all the global transfusions of cash we could see the oil market improve as well. As you know the majority of selling in oil futures and energy stocks were the result of a need to raise cash rather than dump oil. A positive stock market could end that cash drain overnight.

Oil prices under $80 are probably not going to last. Various OPEC country oil ministers have already said they were going to support a production cut at the November meeting. Some are getting positively animated about the need to support prices. The largest producing non OPEC country, Russia, said they could withstand a sustained drop to $50 and would not voluntarily cut production. Saudi Arabia is going to be the swing vote and it is not looking good. Saudi needs to get more than $65 for their oil in order to support the growing entitlement class. Crude consumption in Saudi is growing very rapidly because Saudi gasoline is heavily subsidized. They need higher prices to continue the subsidy and maintain a positive business environment.

OPEC ministers were also making news with a call for more regulation in speculative oil trades. "The recent price swings and high open interest have proven to be speculative in nature and need to be regulated." The CFTC just spent two months researching this problem and claims speculation has only a minimal impact on prices.

Another headline crossing the wires warned that auto sales in China had fallen sharply by -1.4% in September. That headline set the tone but buried later in the text was the truth. China auto sales are up +11.36% YTD over the same period in 2007. China is on track to sell 5.1 million cars in 2008 and the majority are first time car buyers.

With crude prices falling so sharply last week the price of gasoline should be under $3 very soon. That may not be a good thing because it will convince consumers the price spike was temporary and it has passed. They can now feel good about rushing back into showrooms to buy new SUVs. I heard one commentator saying peak oil had been pushed back at least ten years by the financial crisis. That is probably the dumbest statement I have heard in months. The IEA just reported last week that global consumption EVEN WITH a slowdown will grow by over one million barrels per day in both 2008 and 2009.

Jim Brown

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