Sunday, September 04, 2005

Katrina and Crude Oil

In a post a few day's ago I discussed Katrina's significance for the stock market. In this post I want to make a few observations about Katrina's significance for the markets in crude oil and gasoline.

We are in a textbook situation for contrary opinion aficionados. First, the New York Times Magazine and The Economist both published cover stories within the last couple of weeks declaring that the oil market is in crisis and that there is a real danger that prices will go through the roof. This is proof postitive (if you needed any) that sentiment in the oil and gasoline markets is extremely bullish.

Then on August 29 hurricane Katrina devastated the southern coast of the USA with the greatest damage centered around the city of New Orleans. All the nation's news media have been filled with disaster stories this past week. In addition, there has been much commentary on Katrina's likely effects on the crude oil and gasoline markets. This was a true supply shock and the natural conclusion is that prices can only head higher from here.

Hurricane Katrina is what I like to call a crystallizing event. It is an event (not a theory or prediction) which people can point to as a logical reason why the market (for crude and gasoline in this instance) must move in a certain direction (up).

But is that dog barking?

Crude oil futures reached their high points Sunday night, August 28. Since then the market has trended sideways despite the apparent supply shock of the hurricane. Gasoline prices did indeed go up dramatically early this week but by Friday were trading only about 10 cents higher than they were last Sunday night.

In my judgement that dog didn't bark, despite the overwhelming media attention to the potential problem. This confirms my conviction that crude oil and gasoline prices will only move lower from here.

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