U.S. crude for October delivery settled down $2.78, or 3.8 percent, at $69.96 a barrel, having fallen as low as $69.13 in intraday trade. In London, Brent crude settled down $3.14 at $69.65 a barrel.

China’s key stock index dived 6.74 percent on Monday to a three-month low, prompted by concern that China’s government is trying to moderate economic growth and choke off some speculation in its stock market by tightening bank lending.

European equities closed lower and U.S. stocks fell after China’s index fall.

“The oil markets have been strongly affected by what’s going on in China, where the fear is that authorities will rein in on lending and in the process curtail growth,” said Phil Flynn, an analyst at PFGBest Research in Chicago

Jitters about the Chinese economy, the world’s second largest oil consumer, also weighed on other Asian stock markets.

The Organization of the Petroleum Exporting Countries meets to review output on Sept. 9 in Vienna. Several ministers and officials from the group have said it is likely to leave output targets unchanged.

Even though OPEC agreed to 4.2 million barrels per day of supply curbs late last year, and has kept output targets steady so far in 2009, actual production has been rising in recent months, according to industry surveys.

In a further sign of that trend, Abu Dhabi, the main producer in the United Arab Emirates, an OPEC member, will lift supply to Asia in October, the state oil firm said on Saturday.

Despite the indications of higher supply from some in OPEC, oil has rallied from a low of $32.40 in December, the weakest price in nearly five years, to a 2009 high of $75 a barrel last week.

Aug 31 (Reuters)

U.S. crude for October fell 56 cents to $71.93 a barrel by 12:30 p.m. EDT (1630 GMT). London Brent fell 54 cents to $71.97 a barrel.

The losses came as a report showing U.S. consumer confidence at four-month lows pulled Wall Street stock indexes into negative territory, in turn pushing the dollar up against the euro.

Commodities markets have tended to move in tandem with equities and contrary to the greenback as investors look to stocks as a lead indicator of economic performance and buy resources as a hedge against inflation.

Oil’s losses Friday reverse much of Thursday’s $1.06-gain, made on the back of better-than-expected GDP and jobs data in the United States, the world’s largest energy consumer.

Supporting optimistic sentiment, data on Friday showed U.S. consumer spending rose in July and the U.K. economy shrank slightly less than expected in the second quarter.

“The vast majority of economic data that continues to circulate around the media airwaves is positive and suggestive that the worst is definitely over and the recovery has likely begun in most economies around the world,” said Dominick Chirichella, senior partner, Energy Management Institute, Point Pleasant, New Jersey.

But some analysts said stronger economic data in the short term does not overcome a gloomier long-term outlook.

“Despite our confidence in the recovery process over the next six months, there is precious little indication from the energy side that industrial activity in the U.S. is recovering,” analysts at J.P. Morgan wrote in their Oil Markets Weekly note.

Unsold crude stored in tankers at sea continued to hang over the oil market but had declined since the spring.

Norway’s Frontline, the world’s biggest independent oil tanker shipping group, said it estimated that 40 to 45 very large crude carriers (VLCCs), or around 10 percent of the world fleet, were storing crude oil.

Frontline had told Reuters on Aug. 6 that around 50 VLCCs were being used to store around 100 million barrels of oil, down from a peak of around 60 VLCCs in April.

Aug 28 (Reuters)

The number was so big and the results beat Wall Street estimates by so much at a time when the credit crisis was wreaking havoc on so many other sectors that Oppenheimer & Sons (NYSE: OPY) oil analyst Fadel Gheit couldn’t help but quip that he didn’t think Exxon “will be lining up for any TARP money or government handout anytime soon.”

Exxon wasn’t the only heavyweight reaping the benefit of a zooming energy market that had seen crude oil climb to an all-time record of $147 a barrel in July. The combined revenue for Exxon and Chevron Corp. (NYSE: CVX) for all of last year actually exceeded the gross domestic product (GDP) of all but 16 of the world’s nations, Bloomberg News reported.

What a difference a few months can make.

If the name of the game is corporate profits, the global economic slowdown has transformed some of the world’s biggest oil companies from leaders to laggards.

Global-energy heavyweights Exxon and Royal Dutch Shell PLC (NYSE ADR: RDS.A, RDS.B) yesterday (Thursday) became the latest players to feel the one-two punch of dwindling demand and rising supplies, reporting profit drops of 66% and 67%, respectively.

Exxon’s net income fell to $3.95 billion, or 81 cents a share, compared to $11.68 billion, or $2.22 a share, in the same quarter a year ago. The results were well below Wall Street estimates for earnings of $1.02 a share. Shell’s bottom line fell to $3.82 billion, or 62 cents a share for the second quarter, compared to $1.87 per share in the same period last year.

“Global economic conditions continue to impact the energy industry both in the volatility of commodity prices and reduced demand for products,” said Exxon Chairman and Chief Executive Officer Rex Tillerson.

With consumers and companies alike slashing costs in any way possible in an environment of spiraling unemployment and the looming possibility of inflation as a result of government stimulus efforts around the world, Exxon, Shell and other Big Oil companies are feeling the squeeze and are cutting back in almost every way possible.

“Our second quarter results were affected by the weak global economy,” Shell CEO Peter Voser when the results were released. “This weakness is creating a difficult environment both in upstream and downstream” oil production.

Shell, for instance, said it’s embarked on a cost-cutting program that will pare billions of dollars in operating expenses. In one bright spot, however, The Netherlands-based oil giant did say that it had increased its second-quarter dividend 5% to 42 cents a share, and Chief Financial Officer Simon Henry said Shell will be able to keep raising the dividend to keep pace with inflation.

Exxon’s shares fell about 1% yesterday to close at $70.72 each. They’re down about 14% from their 12-month high of $84.76. Royal Dutch Shell’s “A” shares edged up 0.13% to close at $52.53; they’re down 29% from their 52-week high of $73.97.

“There’s a lack of follow-through on production” at Exxon, Macquarie Research analyst Jason Gammel told Barron’s in an interview. “The Street rewards companies that grow production, not those who are flat.”

Exxon’s combined oil and gas production dropped 3% in the quarter, and the company blamed the year-over-year decline on restrictions imposed by the Organization of the Petroleum Exporting Countries (OPEC). Shell’s production suffered more, falling 5.3%, placing part of the blame on a politically unstable Nigeria.

The heft that gave Big Oil companies the huge advantage of global scale last year is now working against them; with their large size, and against the backdrop of a global economic downturn, finding new revenue to bump up profits – and, ultimately, their share prices – will be a major challenge, analysts say.

“I think it’s generally going to be difficult for the Big Oils to move the needle,” Howard Weil analyst Doug Leggate told Bloomberg News. “Those companies that can move the needle in terms of adding value through exploration or other methods of improving their portfolios, they’re the ones who are going to win out.”

Profit at Exxon’s production and exploration unit fell to $3.81 billion in the second quarter, down $6.2 billion compared with a year earlier. In its refining business, its profit fell to $512 million, down $1.05 billion from a year ago. Profit in the same category at Shell dropped 77%, to $1.33 billion, from $5.9 billion a year ago, mostly on lower oil prices.

The grim oil earnings news yesterday followed Wednesday’s report from the Energy Information Administration (EIA) that U.S. crude stocks rose by 5.1 million barrels to 347.8 million barrels for the week ended July 24. Estimates by market research firm Platts were calling for a gain of just 1.1 million barrels, MarketWatch.com reported.

U.S. crude stocks are 29.8 million barrels above the five-year average and 52.6 million barrels above year-ago levels, according to Platts.

“The data has been bearish for most of the year, and the market may be ready to acknowledge that we are awash in crude oil and products, and demand is lower than last year despite the fact that oil and product prices are much lower,” WTRG Economics analyst James L. Williams told MarketWatch. “We will be well into the recovery from the recession before there is any appreciable increase in demand.”

As of yesterday afternoon, crude oil for September delivery was trading at $66.80, up $3.45 a barrel. But that’s down $55 a barrel from this time last year – a 45.16% decrease.

Those hoping for a rally may find that they’ve only engaged in a bit of wishful thinking, since a number of analysts say there aren’t any catalysts for higher prices in sight.

Take James Cordier, president of Liberty Trading Group, who says that the rally to prices in excess of $70 earlier this year was “well overpriced.” He expects prices to continue to fall in the weeks and months to come, Cordier said in an interview with Yahoo Inc.’s (Nasdaq: YHOO) Tech Ticker.

Cordier points to the speculative demand driven by government stimulus packages, notably the liquid commodities in China, a nation whose economy looks “a little bit like a bubble to us.”

Cordier’s firm, which trades commodity-based options, is “selling calls with both hands.”

If there’s an upside to any of this, Cordier says it will be lower gas prices, which he expects to fall 15-to-20 cents per gallon around August or September, a welcome relief for consumers.

The low demand and rising supply of oil is catching the eye of regulators worldwide, who are applying the heat to speculators who are believed to be behind the main force behind wild swings in the futures markets over the past two years.

Here in the United States, the Commodity Futures Trading Commission (CFTC) this week held the second of three hearings on energy trading. In the United Kingdom, the Financial Services Authority (FSA) will hold a special meeting on Aug. 5 with oil companies, banks, hedge funds and oil brokers to review regulation in the market.

“A lot of what we’ve seen in recent years has nothing to do with the underlying fundamentals of the market,” Tom Bentz, a senior energy analyst at BNP Paribas Commodity Futures Inc. (OTC ADR: BNPQY), told Bloomberg. “Something has to be done to reduce some of the speculation, no doubt about it.”

Indeed, the supply-and-demand fundamentals taught in high school and college have actually come under fire just because of how speculators have allegedly distorted the oil-price market in recent years.

This year’s volatility in the market defy the “accepted rules of economics,” French President Nicolas Sarkozy and U.K. Prime Minister Gordon Brown said in an opinion column published earlier this month in The Wall Street Journal.

“The surge in prices last year gravely damaged the global economy and contributed to the downturn,” the two statesmen said. “The risk now is that a new period of instability could undermine confidence just as we are pushing for recovery. Governments can no longer stand idle. Volatility damages both consumers and producers.”

Big Oil executives said it is doubtful the looming U.K.-based meeting would result in any substantial new initiatives, but added that it would discuss “whether the current arrangements [in the oil market] remain appropriate,” The Financial Times reported. “The question of position limits does not seem to have the same level of priority (in Europe) as it does in the United States,” Deutsche Bank AG (NYSE: DB) Chief Energy Economist Adam Sieminski told the FT.

Source: Global Slowdown and Plunging Profits Have ‘Big Oil’ Companies Searching for Ways to Rebound

U.S. crude rose 49 cents to $71.76 a barrel by 1515 GMT, having topped $72 earlier. London Brent crude gained 45 cents to $71.51 a barrel.

Nigeria’s main militant group MEND said Friday it had attacked a pipeline operated by Italy’s Agip , close on the heels of previous attacks on facilities operated by Royal Dutch Shell and Chevron . Together, the attacks have cut at least 133,000 barrels of daily output.

Rebels in Nigeria, the world’s seventh-largest oil exporter, have been carrying out attacks on the oil industry for years in what they claim is a struggle aimed at spreading the region’s energy wealth to the poor local communities.

Oil prices also got support from political turmoil in Iran, the world’s fifth largest exporter, in the wake of its presidential election.

“We will see support continue to come from Iran and Nigeria. There is no immediate supply threat from Iran but in Nigeria, (there) is an actual physical disruption,” oil analyst Olivier Jakob of Petromatrix said.

Analysts said gains on Wall Street, fed by optimism that the worst of the economic recession was over, encouraged commodity buying by brightening the outlook for demand.

Oil prices have nearly doubled since February on signs of a potential economic recovery but the pace of the rally has sparked concerns prices are not well supported by fundamentals.

Adding to optimism in oil markets, the U.S. Transportation Department said on Friday Americans drove more miles in April than they did a year earlier, marking the first monthly rise in U.S. highway travel in more than a year.

NEW YORK, June 19 (Reuters)

Global oil demand is not going to “plummet.”  And for the FT to say so is just plain silly, if not irresponsible.  OK, I know.  There’s an old saying that they teach in journalism schools.  “You have to sell newspapers.”  But this declaration by the FT highlights the perils of letting a headline-writer do your thinking for you.  It’s what I call “arguing a screaming conclusion.”  And a wrong conclusion at that.

Oil Demand – Down, Then Up

But let’s move past the headlines.  The Financial Times article explains that the World Bank has just issued a new study.  The World Bank believes that the world is entering into the toughest economic times “since the Great Depression.”  Thus overall world oil demand may fall by about half a million barrels per day in 2009.  That’s what the World Bank states in its report.

Only half a million barrels?  Heck, the total world demand for oil in the past year was about 87 million barrels per day (a fact that the FT article fails to note).  By comparison, the Saudi oil tanker that was hijacked off the coast of Somalia held two million barrels of crude oil.  And despite this act of piracy oil prices still fell over the next couple of weeks, even without that tanker plying its route across the deep blue seas.

So if the world experiences the next “Great Depression” (Release 2.0, I guess), a reduction in overall oil demand of half a million barrels per day is down in the statistical noise.  And what the World Bank is saying about the grim future of the world economy is not the equivalent of “plummeting” demand.  At least, not half a million barrels of lower usage.

How Bad Is It?

How bad is it out there?  Well, according to this week’s MasterCard Spending-Pulse data, U.S. retail gasoline demand is back to about the same levels it showed earlier in 2008.  That is, high gas prices hurt demand over the summer and into the fall.  (I drove less.  Didn’t you?)  But the current low fuel prices have evidently allowed demand to recover.  People are driving more.  It’s basic Economics 101.

I was talking with an economist for the American Petroleum Institute about two weeks ago.  He told me that overall gasoline demand in October was down 3%, year-to-year.  But diesel fuel usage was up by the same amount.  Overall U.S. oil demand is down about 8%, but that reflects the slowing use of oil in industry.  Out on the road, people are still driving and trucks are still hauling.

For all the sound and fury about the run-up in oil and fuel prices through July, and then the fall in prices after that, the aggregate demand for oil is only changing at the margins.

Built-In Oil Demand

In both the developed and developing worlds, there’s a lot of oil demand built into the economic and social energy system.   That’s what modern development is all about.  That’s how the system was built over the past 100 years or so.  Yes, you can wish that the system were different.  You can even try to change the system – and risk collapsing it in the process.

Whatever you do, you can’t change the system very fast.  To paraphrase a former Secretary of Defense, “You live in the world with the energy system you have.  Not the energy system you might wish you had.”

So at best, if you want to change things you are looking at a generational shift.  If you have a generation.  Do we have a generation?

What Will OPEC Do?

Let’s try looking at some different numbers.  How about 7 million barrels of oil per day?  That’s the amount of output that OPEC might have to shut-in if it wants to get prices headed back upwards in to the range of $75 per barrel or so.  At least, that’s according to Philip Verleger, a long-time industry player as quoted recently in Platt’s industry newsletter The Barrel.

Current daily oil output from OPEC is about 32 million barrels per day.  Verleger thinks that OPEC’s output ought to be more like 25 million barrels per day.  There’s the 7 million barrel shift.  Easy, right?  It would be as if Iran, Iraq and Qatar simply stopped exporting oil.  How likely is that to happen?  Umm… yes.  Clearly, Verleger has a radical take on things.

One way or another, can OPEC cut production significantly?  Does OPEC have the discipline to manage its own affairs to cut 2 million barrels, or 4 million, let alone 7 million barrels per day?   The issue is that numerous OPEC nations cheat on their production quotas.  Hey, they need the money.  Thus they lift the oil and sell it.  Really, cheating on OPEC quotas is not a problem.  It’s a tradition.

What of the Future?

Looking ahead by more than about two years, world oil demand is certainly going to grow.  It almost does not matter what we do in the U.S. or Europe.  When you look at the numbers of young people who are already born and living and growing up in the developing world, the demand will be there.  Many of these young people already have a cell phone and a laptop computer.  When they finish school, they will want an apartment and a car.

And at the rate things are going, the energy industry is still under-investing in the necessary systems of the future.  Depletion is still ongoing.  It gets back to the very basic point that every barrel you lift from the ground leaves one less barrel down there.  And the overall global depletion rate is 6% at best.  Maybe it’s 8%.  It might be 10%.  To replace that depletion, the general trend is for the energy industry to go further away, to deeper waters or more remote sites, to drill deeper wells, with hotter temperatures and higher pressures.  Those little hydrocarbon molecules are just plain tough to catch.

And keep in mind that nobody can produce oil that has not been discovered.  Or developed.  Or for which there are no handling facilities.  That takes investment, and lots of it.  Which requires money and finance, which is in rather short supply just now.  So there are just a few years in which the world can reorder the way it does oil, let alone the big picture on energy.  And there are a lot of moving parts in all of this.

The Moving Parts of Oil Production

One of our fellow (sister, actually) readers is deeply involved in monitoring the world oil situation.  The other day she sent me a thoughtful list of “ifs” that have to happen just to begin to get future oil production on firm ground.  Here it is:

• IF oil price rises above the marginal cost of new non-OPEC supply in time to get new production back on track;
• IF oil-producing countries and China stop subsidizing prices to their own populations;
• IF OPEC gives international oil companies (IOCs) like Exxon, Shell, Chevron, etc. access to explore and develop their reserves;
• IF the trillions in exploration and infrastructure capital are invested;
• IF OPEC invests seriously in increasing their own capacity;
• IF enhanced oil recovery (EOR) processes can really increase the recovery rate as much as hoped;
• IF the reported reserves are really there;
• IF the U.S. Geological Survey predictions of “yet-to-find” oil in the Arctic, offshore and elsewhere are correct;
• IF the Saudis can are capable of reaching and sustaining 15 million barrels per day of output;

IF, IF, IF …

“And,” adds my correspondent, “virtually all of these are outside the control of any policies that might be set by the oil-importing nations of the West.”

So unless a lot of things happen – pretty soon and in the right sequence, and competently — we’re going to be faced with the prospect that there’s not going to be enough oil to go around.  So oil prices are going to head back up.  People and governments are going to get desperate over supplies.  And much of the usual and predictable bad stuff that you’ve heard before is going to happen.  Which gets back to that Financial Times headline.  “Plummeting” demand?  Really.

A Few More Dots to Connect

President-Elect Barack Obama made a major announcement last weekend.  It was along the lines that his administration would work to invest in infrastructure.  Congress loved it because it means that the politicians can appropriate money to spend on concrete and steel.  That’s what I’ve been saying would happen.  But it’s nice to hear it.

The announcement was good in the short term for a couple of the OI stocks, like Alcoa (AA:NYSE), Cemex (CX:NYSE) and General Electric (GE:NYSE).   They all have things to sell into an infrastructure buildout, as do more recent additions like Koppers Holdings (KOP:NYSE) and Allegheny Technologies (ATI:NYSE).

Where will the U.S. government get the money to pay for the infrastructure buildout?  Same place it gets all the money to bail out the banks and Wall Street, I guess.  It’ll borrow it.  And in the process the U.S. borrowing will soak up most of the nation’s “spare” capital, such as it is.  U.S. government borrowing will crowd private borrowing.

The U.S. government can borrow money for the time being.  For some strange reason, people still want to buy U.S. Treasury bills, bonds and notes.  Don’t ask me why.  The interest rates are just about zero (safety sells, I suppose).  And the dollar is strong.

Actually, the dollar is much stronger than it ought to be.  I expect a major dollar-correction in the first quarter of 2009, which will be good for foreign-denominated stocks that trade on the Toronto Exchange.  (Although Canada is having some surprising political issues right now.  I’d appreciate hearing from Canadian readers about their take on what’s going on with Prime Minister Harper.)

In the longer run, the U.S. expenditures will come back as inflation.  That means that you want to look at owning gold and shares in the best-run gold miners.  If I had to pick just one gold miner with the best prospects, it would be Kinross Gold (KGC:NYSE).   It’s well managed.  Kinross just completed a series of mine expansions.  And it’s ramping up production to sell increasing levels of output into a generally rising gold market.

Source: Whither the Oil Markets

Oil rose above $36 a barrel on Friday after the United Arab Emirates joined leading exporter Saudi Arabia in deepening supply curbs in line with OPEC’s biggest ever output cut announced last week.

U.S. crude gained $1.01 to $36.36 a barrel by 1219 GMT, off a session high of $36.90.

London Brent rose 94 cents to $37.55.

“The only positive news (for the market)… came from the UAE,” Olivier Jakob of Petromatrix wrote in a report. “For now at least, Saudi Arabia and the UAE seem to be fully complying with the cuts.”

Abu Dhabi National Oil Co (ADNOC), the main producer in the UAE, the world’s fifth-largest oil exporter, said it would cut supplies of February Murban and Upper Zakum allocations by 15 percent and Lower Zakum and Umm Shaif by 10 percent each.

A source with an Asian refiner said the ADNOC cuts were more than expected.

“ADNOC had already allocated January volumes, but they reversed the decision, so that messes up our schedule,” the source said. “For February, the reduction volumes are very large, so we may need to adjust our ship loadings.”

The allocations follow a decision last week by the Organization of the Petroleum Exporting Countries to reduce supplies by 2.2 million barrels per day.

Saudi Arabia informed its customers even before the OPEC meeting they would be receiving less oil.

The OPEC reduction is its deepest ever as the producer group battles a market slump that has sliced around $110 off the price since a July peak above $147 a barrel.

Oil markets were closed on Thursday to mark Christmas Day.

On Wednesday, U.S. crude had settled more than $3 lower after U.S. inventory data showed a fall in crude stocks, but rises in inventories of refined products and another slowdown in fuel demand.

Negative economic data, including news jobless claims in the United States, the world’s biggest oil burner, had risen to a 26-year high and that consumers had cut spending for the fifth consecutive month in November, deepened the bearishness.

Asian economies, once seen as a guarantee of high oil demand even if the United States faltered, have not escaped.

Japan’s deepening recession is expected to cut oil demand in the world’s third-biggest oil consumer after the United States and China, by almost 5 percent in the year starting April.

Consumption was also seen sliding by 5.7 percent in the fiscal year ending next March, the Institute of Energy Economics, Japan, said this week.

Barbara Lewis, LONDON, Dec 26 (Reuters)

Supplies fell further than expected, with a 4.56 million decline to 302.2 million barrels last week, the U.S. Energy Information Administration announced. At the same time, refineries operated at just 88.6% capacity, a decline of 1.1% from the week prior. Most analysts had expected a mean capacity increase of 0.3%, according to a
Bloomberg News survey.

“This move was sparked by the very bullish crude inventory number,” Daniel Flynn, a broker with Alaron Trading Corp. in Chicago, told Bloomberg. “Falling inventories make us vulnerable to disruptions. The cheap dollar is only adding fuel to the fire.”

The high cost of oil is dampening demand of already overstretched U.S. consumers. U.S. demand declined 1.3% in the four week ended June 6, the energy department said.

However, demand is rapidly increasing in emerging markets such as China, where oil imports shot up 25% last month from the same period a year ago. Imports to the Asian nation increased to 16.2 million metric tons in May, which is about 3.8 million barrels a day, the Beijing-based Customs General Administration of China announced on its Web site yesterday.

“The big crude draw is obviously bullish, but more importantly for the oil markets, the dollar is falling and that could send us back to near $140 a barrel,” Mark Waggoner, president of Excel Futures in Huntington Beach, Calif., told Reuters.

Other factors contributed to the price jump, as well. Nigeria continues to experience production problems due to attacks from the Movement for the Emancipation of the Niger Delta (MEND), which has made life particularly difficult for oil majors such as Royal Dutch Shell PLC (ADR: RDS.A, RDS.B) by bombing pipelines and kidnapping workers.

Russia, the world’s second-largest oil supplier, is also experiencing problems. At a presentation in London yesterday, BP PLC (ADR: BP) Chief Executive Officer Tony Hayward said Russian output would continue to fall without changes to the current tax policy of the Russian government.

“Russian authorities are responding” with fiscal regime changes, though it may take “a couple of years to reverse the current trend,” Hayward said.

High Oil, High Gas, Weak Economy

If oil stays near $140 per barrel, gas prices could easily top $4.75 a gallon by the Fourth of July holiday, Mark Zandi, chief economist at Moody’s Economy.com (MCO), said in a recent research note.

And while the thought of gas at almost $5 per gallon is distressing enough, Money Morning’s Investment Director Keith Fitz-Gerald thinks gas prices could go even higher. In fact, U.S. motorists could easily be looking at $7 a gallon gasoline within just two years. And that could have a disastrous impact on the U.S. economy.

“The bottom line is that the effect on the economy is going to be a lot worse than anyone’s talking about right now,” said Fitz-Gerald, a longtime energy bull who recently boosted his oil-price projection to $225 a barrel. “The bottom line is this: Until someone develops a truly [interchangeable] alternative for oil and gasoline – something that works the same, costs the same and is just as effective – Americans are just going to have to face the fact that over time they’re going to pay more.”

By fixating on near-term prices, and near-term fallout, Fitz-Gerald says that investors and economists alike are missing the bigger point: Long-term – or at least until a true replacement for oil is found – the U.S. economy is going to be badly stung, and U.S. consumers who don’t take steps to protect themselves are looking at a markedly reduced standard of living.

Moody’s Economy.com’s Mark Zandi agrees.

“Unless oil prices soon recede and Washington changes its views and acts to shore up the housing market and broader economy, the outlook for 2009 will weaken further in coming months,” Zandi said.

Zandi added that the U.S. Federal Reserve “will sacrifice near-term growth for the sake of stable prices and the economy’s longer-term prospects” and that the high cost of oil will prevent any further interest rate cuts.

But don’t look for gas prices to move up in a straight line to $5, $6 and $7 a gallon, Fitz-Gerald says. Prices will continue to fluctuate. There will be rallies, and retrenchments, as is the case with the price of any commodity.

But prices will rise, as there is still no truly “fungible” – interchangeable – replacement for petroleum. That’s what’s needed, Fitz-Gerald says.

In the interim, investors should: be “long” on oil and other commodities; have alternative-energy-related investments; and look for profit plays in ancillary sectors, Fitz-Gerald says.

Source: Oil Price Soars $5 on Reduced Supply, Gas Could Head Much Higher

American Airlines, Continental and Delta have all announced cutbacks due to rising fuel costs.

Consumers are also being squeezed. USA Today reports that summer airfares in the US are set to rise by as much as four times thanks to spiraling oil prices.

“The sector-wide downturn is pretty textbook,” says Theo Casey in Fleet Street Daily.

Airliners tend to suffer most in a weak economy. The airlines biz is very cyclical, i.e. very sensitive to the business cycle. Revenues tend to pick up in times of economic expansion, and fall in periods of economic contraction. Airliners also are at the mercy of the oil markets, which are at all-time highs.

This isn’t just a recession. This is a recession combined with the raw asset prices getting too high to handle. Lower revenues were already on the cards with the threat of UK, US and Eurozone recessions. But throwing in oil prices that range from $125 – $135 a barrel, the problem is made much, much worse.

In terms of affordability, air travel has flown in the opposite direction of things like higher education, houses, and designer jeans,” says Andrew Gordon in Investor’s Daily Edge.

People have to fly. And, globally, it’s inevitable that they’ll be flying in greater numbers. Higher prices may slow this trend, but it won’t reverse it. Flying is already taking off in Asia. For example, China’s domestic airline industry is just a fifth of the size of the U.S.’ domestic market, but it’s growing much faster. In 20 years time, it’ll be about half the size of the U.S. market.

And market liberalization is in the air. Many more markets will soon receive a strong boost as governments ease regulations. New Open Skies agreements between the European Union and the United States and Canada are a start. Further market reform will open up Asian and North African markets. The result? The global airline industry will outperform the world economy in the coming years.

The airline industry isn’t so much broken as it is overcrowded. It’s mainly a matter of too many seats available for too few customers. If the industry continues to consolidate, supply and demand should rebalance. Then investors will be able to focus on the solid fundamentals of the industry – reasonable prices and growing demand.

But we’re not done yet. The Senate Commerce Committee hears today from none other than George Soros, who, according to the Financial Times, will “tell US lawmakers that ‘a bubble in the making’ is under way in oil and other commodities and that commodity indices are not a legitimate asset class for institutional investors.”

Not that there aren’t fundamental factors at work in the commodity boom, Soros believes, but the boom is being transformed into a bubble as institutional investors pile into commodity index funds. According to his prepared remarks, “When the idea was first promoted, there was a rationale for it … But the field got crowded and that profit opportunity disappeared.”

“Nevertheless, the asset class continues to attract additional investment just because it has turned out to be more profitable than other asset classes. It is a classic case of a misconception that is liable to be self-reinforcing in both directions.”

As I’ve pointed out before, a primary reason institutional investors are piling into these indices is that they’re shelter from a falling dollar. As fiat paper is inflated into infinity, hedge funds and pension funds seek shelter in real, tanigble stuff.

I’m sure Soros knows this. Whether he’ll actually address this aspect of it today is another matter. Obviously, with such famous trades as his bet against the British pound in 1992, Soros knows a thing or two about falling currencies and how to make money off it. So I’m not really sure what he’ll be getting at today with his testimony.

And here’s something even more puzzling: “Mr Soros will say a crash in the oil market ‘is not imminent’. But he says it is desirable to discourage commodity index investing – or the ‘elephant in the room’ in the futures market – though not with more regulation.”

If more regulation is not the solution — and surely it’s not — what on earth is he doing testifying before a committee that’s looking for scapegoats and excuses for more regulation?

Source: Just What is Soros Getting at?

Then both metals (and a lot of other commodities) got smacked simultaneously. But the boys weren’t through yet! The moment that the London traders closed their doors for the day, another wave of heavy selling showed up on the Comex…triggering more tech fund sell stops in both gold and silver. It was a bloodbath everywhere.

Open interest changes in gold and silver trading for Wednesday are as follows. Gold o.i. fell another 7,783 contracts and silver o.i. was down 74 whole contracts. Today’s COT will show none of this.

In three trading days since the Memorial Day long weekend, gold has been taken to the cleaners for about $55…and silver for about $1.75. In his Tuesday commentary, Ted Butler summarized what happened during the last three days…”While I did not expect this sharp sell-off, its explanation should be clear in hindsight. The dealers (bullion banks – Ed) wanted to reduce their short exposure and rigged prices lower during a thin trading time to get the tech funds selling below the key 50-day moving averages in gold and silver. The commercials (bullion banks – Ed), early this morning, sold a few contracts to get the ball rolling downhill and then pulled their bids until the tech funds starting selling in earnest as the moving averages were broken. Then the commercials bought back all the contracts the tech funds were coughing up. This should be obvious to everyone (save the regulators, who are averting their eyes.).”

I see in an American Press story yesterday that “the CFTC has disclosed that it is six months into a wide-ranging investigation of U.S. oil markets, with a focus on possible price manipulation.” Really??? I’m sure they’ll let us know if ‘8 or less’ traders are long 81.4% of the oil futures market…just like the ‘8 or less’ traders are short in gold at the moment. The CFTC is all over any suspected long manipulation but ignores short-side corners on the market.

My first story today is from Ambrose Evans-Pritchard, the International Business Editor of The Telegraph in London. Just when Wall Street and the Fed are telling us “the worst is over”, Mr. Evans-Pritchard files this story entitled “U.S. and European debt markets flash new warning signals.” The story is linked here.

The second…and very short…story is from over at miningmx.com and is entitled “Gold de-hedging could reach 10 million ounces in 2008″. The link is here.

The only thing really feared by the rest of the world is that the economic collapse of the US, now sliding into deepening recession, will have drastic effects on their own economies. This is the driving power behind these recent world summits (none of which included the U.S. – Ed). Only closer economic relations between these other nations can lessen the effects of the world-wide effects of the coming US economic depression and financial collapse. – Bill Buckler, the-privateer.com, 24 May 2008

Today is first notice day in gold for the June contract. Once that’s behind us, it’s my opinion that this cartel-orchestrated sell-off in the precious metals will be behind us. Don’t forget that the cartel did exactly the same thing to us in April…and in March too! Do you see a pattern??? If you doubt me, check the chart here. The silver chart is identical.

Today is also Friday, so expect anything…and we at Casey’s Daily Resource Plus will see you here on Saturday to discuss it with you. Have a great weekend.

Source: And then there’s this… Friday, May 30, 2008