It sounds worse than it is!

Oil dropped this Week, the Question becoming whether the Trend will continue. One can ignore the early Morning Trade because it is only the Trading houses trying to establish a rally, before the major Buyers have their Coffee. This Trade is minimal, and designed to create a Purchase environment. I am inevitably wrong when it comes to concrete Investment decisions, but expect a Price of $120/barrel for Sweet Crude within 30 Days. Two Reasons guide my expectation: the half-million barrel/Day reduction of American consumption of Oil, and the consumption of foreign Dollar stocks by the purchase of Oil for their own economies.

One of the qualifying elements of the modern Oil market has been the loss of Sale power of Wellhead pricing. Shipping, Refining, and Distribution has frozen out the operative ability of Oil Suppliers to control the Market. The key mechanism here is Consumer control of especially the later two facilities, both dependent on Consumer satisfaction: a dependency sharply reflecting in Consumer reduction of fuel consumption because of disturbance in Household and Business budgets. The realistic Content of this argument would state that the reduction in Consumption will be permanent, as Households are committed to an Energy reduction program, and Business is investing in costly long-term Consumption reduction procedures. We are in the unenviable position of facing Refining and Distribution overcapacity with excessive Capital Ageing. Refining and Distribution needs to Upgrade, but confronts a declining Market.

I would not put much faith in the Rebound of Stocks from the lowered Oil price. It will continue to fall in Price, but Oil should also be decoupling from the Stock markets. There are also two Reasons for this expectation: the first being Commodities has far more effect on the increase, than expressed on the decrease; and second, the Stock markets has too much Paper outstanding, which cannot maintain P/R ratios or sufficient Dividend rates. Stock expansions work great in expanding markets with high Product sales, but contractions require high-priced Quality controls to sustain Product sales, especially under Household constraints like rapid increases in Necessity pricing–like Food or Energy. I do not expect, but would not be surprised by, a decrease of the Dow below 10,000 over the next 18 months. lgl