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Seeing Red

Written by Luke Burgess
Posted June 20, 2005

Dear Wealth Daily reader:

I opened my personal portfolio this morning and what did I see...RED!!

Literally. Every stock I own woke up on the wrong side of bed.

But that seemed to be the norm today as many stocks opened lower on the possibility, or should I say likelihood, of $60 oil.

Without question, Wall Street is concerned with the economic ramifications of $60 oil. But the consumer doesn't seem to be. Take a look around you as you drive to work.

You'll likely notice that most every car, most of them big SUVs, has only one occupant. So it would seem that, at least for now, high oil prices haven't had much of an effect on the public at large.

Of course, there's much more to it than that. Investors worry that such high prices will slow, or even reverse, economic growth. And we have seen the ripple effect of high oil prices, in everything from milk to lumber.

In the first minutes of trading, the Dow dropped 40.66, to 10,582.41.

The S&P 500 was also down 4.09, at 1,212.87, and the NASDAQ fell 8.05, to 2,082.06.

August crude futures sat over 59.50 by late morning.

But as you know, we don't watch the market's every move. As one pundit famously remarked, anyone who spends 15 minutes a year watching the direction of the market is wasting 13 minutes.

We're more long-term, big picture-oriented. And that means higher energy costs and continued bull market in commodities.

Heating oil also rose to $ 1.6754 a gallon, while unleaded gasoline futures were up to $1.6560 a gallon.

On Friday, crude climbed as high as $58.60 per barrel before settling at $58.47, an increase of $1.89 on the New York Mercantile Exchange

That topped the exchange's previous intraday high of $58.28 set on April 4.

Today's prices raised the bar once again.

This recent spike came (according to the talking heads on the Street) on fears that U.S. refineries will be unable to cope with increasing demand in the second half of the year.

"We have been expecting prices to come down for a while but this is clearly not the case. The rally is definitely sustained by gasoline demand in the United States posting a 3 percent yearly growth, which is seen as extremely strong," said Deborah White, energy analyst with Barclays Capital in Paris.

OPEC failed to appease the market last week when it agreed to raise its daily output quota by 500,000 bpd.

It appears that members have already been unofficially exceeding the daily output quota of 28 million bpd level. It's widely reported that the cartel is pumping 30 million bpd. So a 500,000 barrel increase to 28.5 million is strictly window dressing.

Some analysts said that this year's rally has more to do with speculative buying, continued supply fears, and limited excess production capacity.

This contrasts last year, when the record prices were mainly propelled by tensions with oil-producing countries.

"This year we've had a confluence of factors driving up this rally: first, more hedge funds are allocating money to the red-hot oil markets; second, demand is outstripping supply; and third, capacity is tight in refineries and OPEC production facilities," said Victor Shum, energy analyst at Texas-based Purvin & Getz.

"The oil market is prone to price spikes because of capacity tightness, and this attracts the speculators, who tend to buy on momentum," Shum said.

Analysts also said that summer demand for gasoline contributes to the mayhem.

"We saw last week's expectation being built that U.S. refineries would struggle to meet the demand of the driving season. This is likely to provide support for the coming week," said ANZ Bank energy analyst Daniel Hynes in Melbourne, Australia.

Hynes also said crude's rise was moderately due to the kidnapping of two German and four Nigerian Shell subcontractors on Wednesday.

While Nymex oil futures are more than 50% higher than a year ago, they are still well below the inflation-adjusted high above $90 a barrel set in 1980.

But that begs the question; at what price will oil really start to dig into the economy?

We'll save that debate for another day.

But what's for sure is our energy stocks are flying.

- Luke Burgess
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