Bending the Third Rail
Because We Should, We Can, We Do
Thursday, September 21, 2006
Adapt ... Part Deux
I found this article in my local paper this morning:
WASHINGTON - Oil prices fell by more than $1 a barrel Wednesday after the U.S. government released data showing healthy crude inventories and a surge in domestic supplies of distillate fuel, which includes diesel and heating oil.

The selling briefly took oil prices below $60 a barrel - the level OPEC has hinted could initiate an output cut.

"It's a case of a self-fulfilling prophecy," said Alaron Trading's Phil Flynn. "OPEC's been dropping hints that it wants to defend $60, and the market is saying ' OK, let's see you do it.'"
This is funny on several levels. First off, OPEC used to "defend" $30/barrel. Now it's $60? Nice raise if you can get it. A cut in oil output at the $60 level (and successful "defense" of that price) means that the upsurge in oil prices over the last couple of years will be institutionalized, including whatever inflationary pressure that has been caused by the increases. In other words, future crisis increases in oil prices will start at $60 rather than $30.

The second thought I have is that this relatively sudden increase in domestic distillate inventories is not a good harbinger for the economy. With refineries cranking out at full tilt, a large inventory increase suggests that the economy is heading for the tank as the economic engines needs less fuel. The conventional wisdom is for a "soft landing" in the next six months. This datapoint suggests something a little less soft, maybe knocking the landing gear off.

Like a previous post said, my guess is as good as anyone's .... and likely a 50/50 proposition at best. Take that and $4.00 and get yourself a cup of coffee.
Written at 8:54 AM by Greyhair.
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