Oil rallies as bailout plan develops-cnnmoney.com - Mercedes-Benz Forum

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post #1 of 3 (permalink) Old 09-22-2008, 09:10 AM Thread Starter
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Oil rallies as bailout plan develops-cnnmoney.com

Futures up on the last day of the October contract as investors size up the $700 billion plan for Wall Street and the dollar takes a hit.

Oil prices rally after bailout gets $700B pricetag - Sep. 22, 2008

NEW YORK (CNNMoney.com) -- Oil prices rallied Monday as investors were encouraged and the dollar was weakened by the government's $700 billion Wall Street bailout plan.

But market watchers waited for more details on what the plan means and how it will affect the economy and demand for oil.

Oil climbed $3.33 to $107.88 a barrel after reaching as high as $109. On Friday, crude rose $6.67 to settle at $104.55 in the second-largest rise of oil prices in dollar terms on record, behind only by a $10.75 rise on June 6.

Monday is the last day of trading in the October futures contract for oil. As of Tuesday, the front-month contract will be the November contract for oil. The November contract was up $3.62 to $106.37.

Fed bailout: On Saturday, President Bush asked Congress for the permission to spend as much as $700 billion to purchase bad mortgage assets from already struggling financial institutions in an effort to shore up further losses as the credit crisis works its way through Wall Street.

The details of the government's attempt to prop up the financial sector were still being negotiated, but the plan aims to stem any further losses on Wall Street worked and get resume a flow of credit that has become frozen.

Weaker dollar: The Fed bailout "comes at a cost, the weaker dollar," said Phil Flynn, senior market analyst at Alaron Trading. Investors "will look to other currencies to park their money until this entire situation is defined."

The money that the government was planning on spending as part of the proposal "is very debasing to the value of the currency," said James Cordier, portfolio manager of OptionSellers.com.

Crude oil prices were rising as the value of the dollar fell, according to both Flynn and Cordier. Crude oil is traded in U.S. currency around the globe, and so as the dollar weakens, oil becomes more expensive in dollar terms.

The plan "sounds very inflationary at first blush," said Cordier, and "it will be detrimental to the dollar while people sift through the intricacies of the bailout."

However, while the surge of liquidity would devalue the dollar in the short-term, if the money for the bailout were "approved and spent, then we think the dollar would firm up," said Cordier, as the bailout money helped restore confidence to the U.S. economy.

Demand: As the nation's economy softened and demand for energy fell off, oil prices retreated from a record high of $147.27 a barrel, set on July 11. Oil prices have tended to decrease on signs of continued weakness for the economy and rally on signs of economic recovery.

The promise of increased liquidity in the nation's economy was supporting oil prices. "When the market was concerned that the economy was going to collapse, if nobody is lending anybody any money and there is no credit, there is not going to be a lot of energy demand," explained Flynn.

While the promise of the Fed's lifeline to the financial sector may prop up oil prices in the short term, Flynn and Cordier said oil prices were on a downward trend in the longer term.

"We have seen that these high prices are unsustainable," said Flynn. "People are going to be a lot more judicious with their energy use."

Analysts said the bailout plan provided much-needed confidence at a critical moment, preventing crude oil prices from sliding even further. However, "this knee-jerk reaction in commodities due to the U.S. dollar is short termed," said Cordier.

"Demand for energy in the U.S. continues to be weak; globally, demand is weak, too," said Cordier.

Wild week, big moves: As Wall Street was heaved around last week in a series of unprecedented shifts, so were oil prices. After Lehman Brothers (LEH, Fortune 500) announced bankruptcy, Merrill Lynch (MER, Fortune 500) agreed to be purchased by Bank of America (BAC, Fortune 500) and American International Group (AIG, Fortune 500) was resuscitated by a $85 billion loan from the government, oil prices decreased by more than $10.

However, by Friday, oil prices gained back all of those losses and then some on speculation that the government's proposed bailout plan for Wall Street would support the economy and bring demand for energy back to healthy levels.

On Sunday, federal regulators changed the status of Goldman Sachs (GS, Fortune 500) and Morgan Stanley (MS, Fortune 500) to bank holding companies, a move that opens the banks up to greater involvement in retail banking and more funding from the Federal Reserve. The re-classification also means the investment firms will be under the Federal Reserve's supervision.

Hurricanes: The Gulf Coast was still working to get back to full operation after hurricanes Gustav and Ike slammed the production and refinery-rich region.

According to the most recent situation report from the Department of Energy, 89.2% of production in the region remained shut in and 75.4% of natural gas production was still shuttered. With 9 refineries in Texas still shut down, nearly 2.3 million barrels per day less oil have been processed in the region, according to the DOE.

As of Friday, personnel were still evacuated from 262 of 717 - or 36.5% - of manned production platforms, according to a report from the Minerals Management Service. To top of page
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post #2 of 3 (permalink) Old 09-22-2008, 09:11 AM Thread Starter
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here we go again(sights)

this is the comment that has me worried "However, by Friday, oil prices gained back all of those losses and then some on speculation that the government's proposed bailout plan for Wall Street would support the economy and bring demand for energy back to healthy levels."
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post #3 of 3 (permalink) Old 09-22-2008, 09:31 AM
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Drill! Drill! Drill!

Recall that earlier generations faced down fascism and communism not just with missiles and tanks, but with sturdy alliances and enduring convictions. They understood that our power alone cannot protect us, nor does it entitle us to do as we please. Instead, they knew that our power grows through its prudent use; our security emanates from the justness of our cause, the force of our example, the tempering qualities of humility and restraint.

-President Barack Obama, 1st Inaugural address
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