Tuesday, August 12, 2008

Crude Oil Falls Again - Market Rallies

Oil prices continued their fall on Monday as crude oil traded at a three month low before moving up fractionally but still finishing down for the day. The drop was caused by the strengthening U.S. dollar and data that revealed that China's energy demand could be stalling.

Peter Beutel, president of the energy risk management firm Cameron Hanover, wrote in a research note that investors appear to be selling commodities to get back into stocks. Beutel noted in his note that crude oil open interest has dropped by more than 100,000 contracts since the record high in mid-July.

In Monday's oil trading, the military conflict between Georgia and Russia set the tone on supply worries, and oil rose in response. Later, the rallying dollar continued to push oil prices lower. The big news though was a report that stated that China's crude oil imports are down 7% year over year. As the market took in the report, oil dropped. We have all heard about the continued demand and growth in emerging markets, and this maybe just a hiccup, but did the high price of oil force the demand lower in emerging countries? This is a question investors continue to ask themselves.

On the stock market, the Dow finished up 48.03 (0.41%) at 11,782.35. The S&P 500 index rose 9.00 (0.69%) to 1,305.32. The NASDAQ rose 25.85 (1.07%) to 2,439.95,

The market moved higher on the fall in oil prices before slowing down after the Fed reported on the credit situation. The report showed a strained credit market. About 75% of the banks in July had increased requirements for prime mortgages which was up from about 60% in April according to the report.

This essentially means that lending institutions (banks) are being bit more cautious when they underwrite debt. They are trying to be conservative with their capital for the first time in years.

The positive for the banks though is that they have a huge supply of money to lend at very low interest rates. The spread between the short and long term rate is rather substantial, so the banks make more and more money. They just want to be sure that they are not caught napping on debts/mortgages going forward.

Source: Yahoo

No comments: