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$1.59 Gasoline

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Yes, you read that right. Unfortunately it will not be the price you pay at the local service station. That was the low for the November gasoline futures on Thursday. The good news is this should eventually translate into significantly lower prices at the pump but anything under $2 would be a real stretch.

The sharp drop in oil prices to $68.57 intraday was due in part to a large spike in crude inventories for the third straight week. Inventories of oil rose +5.6 million barrels after rising +8.1 and +4.3 over the prior two weeks. Gasoline inventories, spurred higher by a frantic refining pace to alleviate the shortage in the southeast rose by more than 7 million barrels each of the last two weeks. The spike in crude levels came from a backlog of storm-delayed tankers finally unloading their cargos. The inventory gain was in spite of more than 600,000 bpd still offline in the gulf.

Crude oil demand in the U.S. rose last week for the first time in six weeks as gasoline prices fell and the first wave of cooler weather had consumers starting their winter heating oil buying.

Crude oil also fell on the early morning economic reports and fears the world was falling into a sharp recession. The Philly Fed Survey fell to -37.5 from +3.8 for the largest ever month-to-month decline and the lowest level since 1990. This suggests the ISM could plummet to -22 if the same numbers are received. Industrial production fell by -2.8% and was one of the worst ever declines. Production has contracted at a 14.5% annualized rate over the last three months and this was the worst reading since 1981.

OPEC also announced they were moving up their emergency production meeting to next Friday from November 18th. It is obvious they are going to cut production and probably by a large amount to offset the falling prices.

After closing at $69.81 and the first close under $70 since August 23rd 2007, crude prices rebounded overnight to $73 on expectations that global recession fears may be overblown. This decline has been more a function of forced liquidation than fundamentals. On Wednesday fears over the Citadel hedge fund pushed the market to its largest one day percentage loss since 1987 and TrimTabs said hedge funds saw redemptions of $43 billion in September and that number would likely be larger in October. With hedge funds running leverage of 8-10:1 or even greater a $43 billion withdrawal could have had the impact of $500 billion in actual selling power. Add in redemptions at 7,000 mutual funds and you get the massive swings we are seeing in the markets. Thursday's range was over 800 points with the VIX moving over 80 for the first time.

Energy stocks were mostly higher for the day with the majors gaining back much of Wednesday's losses. For example XOM gained +7, DVN +7, EOG +8 and APA +10.

Even $70 oil will continue to add to profits and with OPEC set to drastically cut production we can expect a bottom very soon. I would not be surprised if we saw it on Thursday at $68.57.

Jim Brown

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