Oil back over $40 as Dow reaches 6-year low

By Pete Southern in LiveWire Economics Blog | February 20, 2009 15:03 |

Light sweet crude oil climbed $2.77 on Thursday (February 19) to settle at $40.18 in New York trade. A new government report showed that US oil inventory levels fell surprisingly, while use of gasoline and other petroleum products may be on the rise for the first time during the course of the recession.

Even with this recent drop off in oil inventories, oil reserve levels are still close to levels last seen in 1990, around the time of the Iraq invasion of Kuwait. It will take a sequence of a few months of drops in oil inventories to present the possibility of the bear market bottom for the commodity. Large inventory reserves combined with low consumption of petroleum has contributed to the fall in oil from its $147 per barrel peak in mid-July.

Oil has bandied about in the $33-45 per barrel price range for several weeks now. Some forecasts have called for a bottom price of $25 to come into play at some point before the slow turnaround begins. However, with the sudden decline in oil inventories, the bottom may have already been reached in the low-$30’s. High end forecasts for 2009 are for $60-70 per barrel.

According to other data, it appears the trend of Americans cutting back on travel and gas consumption in the midst of the economic crisis may be nearing a bottom as well. It makes sense that with historically high levels of unemployment, there are have been fewer miles traveled. Many consumers and businesses have made conscious decisions to eliminate non-essential travel. However, the four-week moving average shows an .8 per cent rise in gasoline consumption.

The Department of Transportation still says the trend of less driving continues. US drivers covered 3.8 billion fewer miles during the month of December 2008 than they did in December 2007. This marked the 14th consecutive month of less driving and a total during that timeframe of a 115 billion miles drop off. It will be interesting to see if January’s data shows the trend is continuing given the rise in gasoline consumption.

The economic picture still looks pretty frightening to many Americans. The nearly $800 billion economic stimulus plan has not appeared to do much for public or investor sentiment. The Dow reached its lowest level in six years Thursday when it dropped 89 points to 7,465. Amazingly, this is a little over half of the total value of the index at its high point over a year ago. The most pessimistic prognosticators say it is not out of the realm of possibilities that the Dow could get as low as 3,000 by the time the economic crisis hits bottom.

The late addition of a mortgage assistance program in the Obama bailout plan has been the topic of much conversation the last several days. Some economists applaud the move yet say the funds are not nearly enough to plug the major hole in real estate that has produced so many foreclosures. Other Americans have questioned the fairness in the mortgage package as those who are barely covering their payments, yet getting by, must continue to struggle, whereas people who cannot keep up with their payments are going to receive help.

Market Recap

Wednesday was the epitome of a flat market. The Dow gained a total of 3 points on the day after some up and down movement throughout the day. Oil prices fell to around $35. Investors still appear concerned over the Obama stimulus plan, including the mortgage bailout assistance. The Dow reached a historical mark Thursday as the index fell to a 6 year low at 7,465, down 89 points on the day. Analysts predict jobless claims could be at their worst yet for February. The dollar was up across the board. Light sweet crude oil jumped $2.77 to close over $40 at $40.18.

Neil Kokemuller
9:02 PM EST
Thursday, February 19, 2009

Neil Kokemuller is an Associate Professor of Marketing at Des Moines Area Community College in Des Moines, Iowa, USA. He has a MBA from Iowa State University.

Please note: The information provided in this article is intended for informational and entertainment purposes, and not as advice for financial decisions or investments. Actions taken on the basis of the information shared is at the sole risk and discretion of the individual. Currency investment poses significant risk of loss.

Pete Southern About Pete Southern
Pete Southern is an active trader, chartist and writer for market blogs. He is currently technical analysis contributor and admin at this here blog.



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