Another crude oil price collapse of nearly $5 today has fueled a very solid stock market rally, amounting to a more than 300 points increase on the Dow. What a welcome relief! Gasoline futures prices have also dropped. I hope that the American people will keep up the pressure on their elected leaders to produce more energy at home, or the escalated oil prices will return again soon.
Crude Oil
Stock Market
Not to ruin the party, but there are a few ominous signs to be on the lookout for:
- There is armed conflict today between Georgia, the former oppressed Soviet state that declared its independence after the dissolution of the Communist Empire, and Russia. We don't currently know the extent of this conflict. This has the potential to escalate into a potentially very grave situation. Let's hope it doesn't. The futures markets have dismissed this danger today, but if it escalates or continues for long, it will bring a swift end to lower energy costs. Europe is particularly at grave risk, since they depend heavily on Russia for energy.
- Credit card companies have been reporting that as prices have declined in recent weeks, gasoline purchases have once again begun to rise. For the past four consecutive weeks, gasoline purchases have increased.
- Additionally, this past Wednesday, gasoline inventory was announced by the U.S. government this week as having declined for a second straight week. Gas price declines this week were probably due to increases in crude oil stocks. There is a fundamental conflict here, closely related to the "crack spread", which is the difference, or spread, between the price of crude oil and its derived distillates. This conflict between gas prices and falling inventory must find resolution. So much the conflict between gasoline and crude oil inventories. Eventually, the two will reach a happy medium and they will come back together. Then, prices will probably begin their ascent once again.
- If this crude oil price collapse is based upon lower gasoline demand, and the stock market rally is also, then when the stock market and the U.S. economy begin to show signs of recovery, crude oil prices are certain to recover and head higher as well. This stock market rally is not based upon fundamentals of a sound economy. Therefore, the slightest hint of higher crude oil prices could send the stock market into a tailspin again.
