Friday, May 19, 2006

Smell on the Wind

The Price of sweet Crude dropped below $68/barrel today based upon Newscasters' thought as a sympathy sink with the drop in Metals. Don't think so! Methinks We are seeing a Market trend here, and understanding of Markets can be helpful. Markets traditionally advance, retreat, then return to about 25-30% of the previous advance where they stabilize for a short Period lasting from 3-24 months. I will make the totally unsubstantuated prediction that Oil will reach $50/barrel by the end of July, then the cycle will drive it back close to $60/barrel by the end of August.

What could make me advise such a ridiculous idea?

China is in trouble. Internal Wage rates are rising in the Export arena faster than the International average, and production levels are falling without those Raises. The Labor Forces of other nations are looking like an equally good deal, and doing business elsewhere is easier and cheaper due to Chinese overregulation. A second element is the American Consumer, who faces vast Inflationary increases in Energy and Utilities, and is adjusting their Consumption patterns accordingly. Their purchase patterns are decreasing purchase of the very Products which are the Chinese Export backbone. The Chinese economy is slowing, and likely not be able to accomplish better than 2% economic growth, until their Export pattern improves. Other nations lack the resources to take up the slack, and American Business is not prepared to invest under the current economic conditions. Chinese Oil Imports may decrease by 10-12% this Year.

Study of the American economy highlights a condition which this Author sees no definite pattern, but always held a suspicion of the existence of it. Precisely stated: Utility charges to Consumers always increase before an economic slowdown. The reasons for this are varied. One reason is that Utilities are basically second-hand, or Retail Consumers of Energy. They are also second-hand Consumers of Capital Equipment. They, like normal Consumers, receive their Costs increases only at the tail-end of the Production Cycle. Their increased Charges, though, have a distinct suppression on Consumer purchases.

Leading Indicators Index express a potential slowdown in the American economy. China seems destined to have a slowdown as well. The rest of the World is not likely to substitute a viable economic impulse to take up the slack. The American Tourist season promises to suppress the price of Oil even more, as will the slowdown in American Construction. OPEC may cut Productrion, but this is self-defeating; they are confronted with massive Capitalization payments in the near future, and pumping cheap Oil remains a better Capitalization payment system, than drawning down upon their present financial reserves. lgl

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