Thursday, February 21, 2008

Your Money and the Price of Oil
(from English Aljazeera)

It doesn’t take an economist to figure out that our future looks pretty bleak and that some of the new words coming into American consciousness are bad news: subprime, hedge funds, debtor nation and a host of others.

Weird Wally has tried to understand all of it, but the articles about current economic trends always seem to involve a lot of numbers and graphs and since WW is not a numbers kind of guy (they actually give WW a headache), he gets it but does not understand it.

This morning however, WW came across a piece on English Aljazeera that seems to explain a very complicated situation in such a way that even WW caught a glimpse of understanding.

Oil prices continue surge

Investors bought futures believing interest rates will fall, weakening the dollar and feeding demand। Oil futures have briefly pushed past $101 a barrel after the US Federal Reserve lowered its forecast for US economic growth this year, convincing energy investors that the central bank will slash interest rates further. The contract for March delivery of light sweet crude, which was expiring later on Wednesday, rose 73 cents to settle at a record $100.74 on the New York Mercantile Exchange after earlier rising as high as $101.32, a new trading record.

That is just below the $101.70 peak, adjusted for inflation, hit in April 1980, a year after the Iranian Revolution, according to the International Energy Agency.

On Tuesday, the contract had jumped $4.51 a barrel.

The Federal Reserve said damage from the housing slump and problems in the credit markets will slow economic growth to between 1.3 per cent and 2 per cent this year, down from a previous forecast for GDP growth of between 1.8 per cent and 2.5 per cent.

Oil investors often react by selling on concerns that the economy - and thus demand for oil, is cooling – or as they did on Wednesday, by buying on the prospect that interest rates will fall, weakening the dollar and feeding new buying of oil futures.

Phil Flynn, an analyst at Alaron Trading Corp in Chicago, said "the Fed was ... the catalyst to get us going here".

Falling rates tend to weaken the dollar, and crude futures offer a hedge against a falling dollar.

In the moments after the Federal Reserve released its forecast, oil prices spiked sharply.

Cooling US economy

Two new economic reports on Wednesday suggested the US economy is cooling.

The labour department said its consumer price index, a measure of inflation, rose by 0.4 per cent last month, more than economists expected.

The commerce department said construction of new homes and apartments rose by 0.8 per cent in January, but that applications for building permits, an indicator of future activity, fell by 3 per cent.

The reports come a week after the Energy Department, the Organisation of Petroleum Exporting Countries and the International Energy Agency all lowered their oil demand growth forecasts for this year.

But the prospect that the Federal Reserve will reduce rates proved too strong on Wednesday, feeding a new buying frenzy, analysts said.

There are concerns that high oil prices – and the higher petrol and heating oil prices they spawn – are sowing the seeds of their own destruction by contributing to the economic slowdown.

"The price gains raise questions about their sustainability in the face of eroding fundamental strength," said Antoine Halff, an analyst a Newedge USA LLC in a research note.

Weird Wally Wants to Know

What is the best possible sound bite for a situation such as this?

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