Wednesday, September 24, 2008

Oil rises as market wait

Oil prices rallied Wednesday as the market waits to hear from Congress about the proposed $700 bailout plan and for weekly supply data from the government.

Oil climbed $1.24 at $107.85 a barrel. On Tuesday, oil slipped $2.76 to settle at $106.61 a barrel as the market refocused on how the dour economic situation has crimped demand.

Bailout plan: The oil market has been waiting to hear from Congress about a $700 billion proposed bailout plan for beleaguered financial services companies. The debate over the rescue was very heated Tuesday.

The plan could pull oil prices higher, depending on the specific terms of the plan and depending on the economy's reaction to whatever plan is adopted.

If the bailout were passed and served to jumpstart the lethargic economy, the oil market hopes that demand for energy would recover to healthy levels. If the economy recovers and demand for oil recovers, then oil prices jump.

Dollar: At the same time, the plan involves a unprecedented shot of liquidity to the market and the sheer quantity of dollars being pumped into the market would devalue the greenback. Crude oil is traded in U.S. currency across the globe, and so when the dollar loses value, crude prices increase.

In the past couple sessions, oil prices have zig-zagged, and the dollar's volatility has contributed to the movement in the price of oil.

On Wednesday, "the dollar is down just a bit again and that is always positive" for oil prices, said Neal Dingmann, senior energy analyst for Dahlman Rose.

Demand: However, the fact that the economy is in desperate need of a lifeline highlights just how weak the economy is, and raises fresh concerns about demand. A limping economy does not have a healthy, growing appetite for oil.

The market continues to swing off the perceived level of demand for energy and the level of demand for energy swings off the strength of the economy. Therefore, the oil market watches the broader economy for clues on a daily basis.

Goldman Sachs Group (GS, Fortune 500) announced Tuesday that it will receive a $5 billion investment from Berkshire Hathaway. Goldman will sell $5 billion of preferred stock to Warren Buffett's company, which was a much-needed vote of confidence for the investment bank in a time of unprecedented uncertainty on Wall Street.

"When you have support either from Buffett or the Treasury Secretary," said Dingmann, "any support for the underlying financial markets boosts the overall market, or thus overall demand, which is positive for oil prices."

Supply report: The government's weekly supply oil data was due out later Wednesday from the Energy Information Administration. The market watches the report very closely in order to gauge demand for energy. The report should also give some indication of the stage of recovery of the Gulf region after Hurricanes Gustav and Ike.

"This will definitely give us another glimpse on the aftereffects of how the storm has played out," said Dingmann.

Crude oil stockpiles were expected to increase by 1.6 million barrels, according to a consensus estimate of industry analysts surveyed by Platts, a global energy information provider.

Gasoline stocks were expected to drop 5.1 million barrels and the Platts survey forecast that distillate stocks - used for heating oil and diesel fuel - would be 1.8 million barrels lower than the previous week. The Platts survey forecast that refinery utilization or run rate would fall 3.5 percentage points to 73.9%.

Gustav, Ike: Hurricane Gustav slammed the Gulf of Mexico on Labor Day and Hurricane Ike hit the Coast of Texas nearly a week later. The storms shook the production and refinery-rich region.

The Minerals Management Service reports that 23 manned oil platforms have been destroyed by Hurricane Ike. Of the 694 remaining platforms, 203 production platforms, equivalent to 29.3%, were still evacuated.

According to the most recent situation report from the Department of Energy, 76.6% of production in the region remained shut in and 65.5% of natural gas production was still shuttered. With 6 refineries in Texas still shut down, nearly 1.7 million barrels per day less oil have been processed in the region, according to the DOE.

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