Monday Aug 07, 2006

The News for Today: America's largest oil field is being shut down.

Taipan Group's Dynamic Market Alert

The News for Today: America’s largest oil field is being shut down.

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The News for Today: America’s largest oil field is being shut down.

BP, plc (BP:NYSE) has announced that Prudhoe Bay in Alaska’s North Slope, which supplies 8% of our oil, is closing down, cutting off 400,000 barrels a day. That’s nearly half of the North Slope’s total production.

According to my esteemed colleague and WaveStrength’s in-house commodities expert Sara Nunnally:

“BP spokesman Daren Beaudo told CNN that he didn’t know when production would resume.

“He said that 16 anomalies in 12 sections of Eastern Prudhoe Bay pipeline were reported on Friday, found in late July by ‘smart pigging.’ Smart pigging is an inspection process executed by sending a machine down through the pipeline. This machine used to be a pig’s skin filled with air used to measure the speed of oil passing through the line.

“One of these 16 anomalies was found to be a leak, and upon further inspection, workers found that four to five barrels of oil were spilled on the tundra.

“BP said that it will take days to shut down the area, and it is still making inspections of its pipelines. The field will be shut down indefinitely until all problems have been discovered and fixed.

“A CNNMoney.com reported that gasoline prices could rise 3-5 cents per gallon and stay there for several days. It noted that the national average price per gallon is currently at $3.036 -- a mere $0.012 shy from the record high after Hurricane Katrina.”

This morning, sweet crude oil rose by $1.59 to $76.35 per barrel. Gasoline rose more than four cents on the Nymex.

Of course, that’s not the only news putting the market at a standstill. As I write, stocks aren’t necessarily being pummeled… The Dow is only down 12 points and the S&P only down 2 points.

It’s the impending Fed minutes that people are holding their breath for…

The News for Tomorrow: To Pause or Not to Pause?

Investors aren’t lifting a hand until the Fed tells them whether interest rates are changing or staying the same.

According to Bloomberg.com, “Federal Reserve Chairman Ben S. Bernanke may have waited too long to step off what he's called the ‘escalator’ of steadily rising interest rates.”

Tightening over the year hasn’t affected the market or investors’ sentiment much yet: The Dow Jones Industrial Average is still up 4.75% from where it started in January. And all of the top 10 Dow components that have announced second-quarter earnings, including Caterpillar Inc. (CAT:NYSE), Procter & Gamble Company (PG:NYSE), and Exxon Mobil Corporation (XOM:NYSE) posted modest to fantastic profits.

These second-quarter earnings gave the Dow a bit of a boost, spurring the recent rally breakout from a series of falling highs. For now, the Dow is waiting to see what Bernanke will do and pausing seems to be the general consensus. Over-tightening is feared, and expectations of further loosening are beginning to swirl around analysts’ lips.

The most important aspect of tomorrow’s Fed minutes is how the market will react. Looking over the past five August Fed meetings, I found the following data:

The August 9, 2005 Fed meeting boosted short-term interest rates by 25 basis points to 3.5%, “providing ongoing support to economic activity… despite high energy prices.”

The Dow closed up 78.02 points.

The August 10, 2004 Fed meeting boosted short-term interest rates by 25 basis points to 1.5%, as “the economy nevertheless appears poised to resume a stronger pace of expansion going forward.”

The Dow closed up 129.12 points.

The August 13, 2003 Fed meeting paused short-term interest rates at 1.00% because “spending is firming, although labor market indicators are mixed.”

The Dow closed up 91.94 points.

The August 13, 2002 Fed meeting paused interest rates at 1.75% because “the softening in the growth of aggregate demand that emerged this spring has been prolonged in large measure by weakness in financial markets and heightened uncertainty related to problems in corporate reporting and governance.”

The Dow closed down an atrocious 200.76 points.

And finally, the August 21, 2001 Fed meeting lowered the short-term interest rate target to 3.50%, since “business profits and capital spending continue to weaken and growth abroad is slowing, weighing on the U.S. economy.”

The Dow closed down 145.93 points.
So where does that leave us? After this past June’s Fed statement that “recent indicators suggest that economic growth is moderating from its quite strong pace earlier this year, partly reflecting a gradual cooling of the housing market and the lagged effects of increases in interest rates and energy prices.”
I’m expecting a pause.
Corporate profits aren’t too bad. Sure, we’re all feeling the brunt of increased consumer and gas prices, but I don’t expect tomorrow’s language to be worse than that reported in August 2002’s Fed statement or, even that from August 2001.
With the Dow right below a solid breakout point above June and July’s highs, investors will most likely see a pause as a reason to pump money into the stock market. And by my calculations, a rise to Dow 11,400 in the short term shouldn’t be unexpected.

Ann Sosnowski
Senior Editor, WaveStrength

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