Oil prices bounce off 17-month low

Oil prices bounce off 17-month low

ALEX KENNEDY
Wednesday, October 29, 2008
SINGAPORE — Oil prices bounced off a 17-month low Wednesday in Asia as a rally in global stock markets boosted investor confidence that the worst of a global economic slowdown and its impact on crude demand has been priced in.

Oil investors have been closely tracking equity indexes for signs of market sentiment about how deep and widespread the global downturn will be. They took heart from a rally in stocks that began Tuesday in Asia, followed through to Europe and the U.S. and continued Wednesday in Asia.

“Everybody is looking to Wall Street for guidance,” said Gavin Wendt, head of mining and resources research at consultancy Fat Prophets in Sydney. “The positive momentum in stock markets has had an impact on commodities.”

Light, sweet crude for December delivery was up $1.95 to $64.68 (U.S.) a barrel in electronic trading on the New York Mercantile Exchange by midafternoon in Singapore. The contract overnight fell 49 cents to settle at $62.73, the lowest closing price since May 15, 2007.
Oil prices have fallen by about 57 per cent since peaking at nearly $150 a barrel in mid-July.
Japan's benchmark Nikkei index jumped 7.7 per cent on Wednesday while Australia's key stock index rose 1.3 per cent. The Dow Jones industrial average soared nearly 900 points, or nearly 11 per cent, its second-largest point gain ever.

The U.S. Federal Reserve is expected to cut its target fed funds rate by half a point to one per cent on Wednesday and investors are speculating the Bank of Japan may trim interest rates when it meets Friday.

Investors are also watching for signs of slowing U.S. demand in the weekly oil inventories report to be released Wednesday from the U.S. Energy Department's Energy Information Administration. The petroleum supply report has shown larger than expected increases in oil, gasoline and distillate stocks during the last few weeks, suggesting U.S. motorists reduced driving after oil surged to a record high in July.


OPEC members warned Tuesday that lower oil prices threaten to make unprofitable key oil infrastructure investment, which could undermine future production.
At an annual oil and money conference in London, United Arab Emirates Energy Minister Mohammed Bin Dhaen al-Hamli said the current crude prices were “very dangerous for the world's economy.”

“OPEC would like to protect the $80 price level,” Mr. Wendt said. “Many OPEC members haven't made the proper investments in their aging infrastructure.”
In other Nymex trading, gasoline futures rose 3.7 cents to $1.49 a gallon, while heating oil gained 3.8 cents to $1.95 a gallon. Natural gas for November delivery increased 12.4 cents to $6.31 per 1,000 cubic feet.

In London, December Brent crude rose $1.96 to $62.25 a barrel on the ICE Futures exchange.
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Oil predictions: Drop From $200 to $50

Oil predictions: From $200 to $50

Tuesday, October 28, 2008
Say goodbye to predictions for crude oil hitting $200 (U.S.) a barrel. Say hello to $50 oil.
Okay, Merrill Lynch was never the most bullish on oil, but the commodities strategist there nonetheless ratcheted down his expectations for oil prices this year, and noted that his prediction for 2009 could take a beating.

Francisco Blanch, commodity strategist at Merrill Lynch, lowered his forecast in the fourth quarter to $78 a barrel from $107 previously – a sign that observers are beginning to throw in the towel for[amp]nbsp;expectations of an imminent energy rebound.

“Demand for physical commodities is tanking in many parts of the world, with U.S. oil consumption contracting at the sharpest rate since 1980,” he said in a note written last Friday but only released to the media on Tuesday. “More importantly, we are starting to see signs of oil demand slowing in emerging markets.”

For 2009, he believes oil will rise to $90 a barrel. But he acknowledges that there are downside risks to this prediction: “If we do indeed embark on a global recession next year, oil prices will likely drop to $50 a barrel,” Mr. Blanch said.

On Tuesday, oil traded at $63.21 a barrel, relatively unchanged after an earlier rally.

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Housing market ‘alarms' Merrill

LORI McLEOD
Tuesday, October 28, 2008

Merrill Lynch & Co. economists are becoming more “alarmed” about the Canadian housing market every day as their data suggest it is tracking the United States with a two-year lag.
Falling prices, overbuilding and too much unsold inventory in Canada are creating a trend similar to that in the United States a couple of years ago, Merrill economists David Wolf and Carolyn Kwan said in a research note Tuesday.

“Though the consensus does seem to be gravitating towards our view of a sustained downturn in the Canadian housing market, we still do not sense any particular alarm in either the policy-making or forecasting community. We ourselves are getting more alarmed by the day,” Mr. Wolf and Ms. Kwan said in their report.

Many other economists believe Canada is in for a moderate downturn next year, but is differentiated from the U.S. experience by more prudent lending practices for both home buyers and developers.

There are a number of reasons the risk of lower house prices is not as magnified in Canada as in the United States, said Derek Holt, economist at Scotia Capital Inc.

“I still agree that Canadian housing markets have been in correction mode all year long, and that further downsides lie ahead. But the macroeconomic implications are not as stark in Canada given a lower degree of leverage on household balance sheets, on bank balance sheets through a much healthier banking system, and through the avoidance of heavily leveraged off-balance-sheet instruments that caused much of the troubles in the U.S.,” Mr. Holt said.

Merrill has a more bearish view, and made headlines recently with a report suggesting Canada's high household deficit level could make it vulnerable to a U.S.-style housing collapse.

“In our ‘tipping point' piece a month ago, we presented a chart showing the ominously high correlation between the price action in the Canadian housing market and that of the U.S. market two years earlier ... Evidence from the supply side further reinforces that Canada's housing market seems to be tracking the U.S.' with a two-year lag,” Tuesday's report said.

The earlier report raised hackles in the real estate community, and questions during the election campaign even prompted Prime Minister Stephen Harper to say Canada's housing and construction markets remain stronger than those in the U.S.

The same two-year lag idea was raised this summer by Douglas Porter, deputy chief economist at BMO Nesbitt Burns Inc., who called the apparent trend “unnerving” in a report in July.
At the time, Mr. Porter said there were many reasons why the two markets were different, but said even a pale version of what had happened in the United States would be bad news for Canada.

House prices posted a record 16.6 per cent year-over-year decline in the United States in August, according to the benchmark S&P/Case-Shiller Home Price Index report, also released Tuesday. The index has now shown year-over-year declines for 20 months.

Taking into account the two-year lag, Merrill's data suggests the ramp-up in construction of housing units in Canada may be even larger than it was in the United States.

The number of units under construction currently is just off the peak hit in May, which was the highest recorded in 36 years of available data and 97 per cent above the long-term average, the report said.

By contrast at its peak in 2006, U.S. housing construction was 54 per cent above the long-term average, it added.

As of August, there were more condos under construction in both Toronto and Vancouver separately than there were in all Canadian cities combined a decade ago, Mr. Wolf and Ms. Kwan said.

“And as in the U.S. two years ago, we are now seeing completed units pile up unsold in Canada, a clear sign of overbuilding and an ominous sign given the voluminous supply still in the pipeline,” they said.

Inventories of unsold new single-family homes in Canada rose by 56 per cent year over year as of last month, close to the maximum increase in July 1990, which marked the last housing market downturn, the report said.

At the peak in April 2006, inventories of unsold new single-family homes in the United States were up 26.5 per cent over a year earlier, the report said.

The two-year lag could be the result of Canada having more room to run up because its recovery started later than that of the United States. Strong commodity prices and looser lending standards initiated in 2006 may also have contributed to the lag, the report said.

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