OPEC Maintains Output, Crude Cracks $65

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1. OPEC Maintains Output, Crude Cracks $65
2. Soros: Housing Bubble to Hurt Consumer Spending
3. Fed's Minehan: GDP Growth Slowing
4. U.S. Gas Prices Tumble for a Second Week

1. OPEC Maintains Output, Crude Cracks $65

The Organization of Petroleum Exporting Countries (OPEC) today agreed to keep production levels unchanged. The decision sent crude oil prices below $65 a barrel.

OPEC, which supplies 40 percent of the world's crude oil, was widely expected to maintain its production levels. OPEC sets oil-production quotas for each of its member countries. The group currently targets an output of 28 million barrels of oil per day, a level it has maintained since July 2005.

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OPEC wants oil prices to stabilize so that elevated energy prices don't cause a pullback in demand from its customers, especially the U.S., which is the world's largest consumer of oil. Talk that the U.S. economy may slump into a recession or a protracted slowdown is causing OPEC to continue pumping oil, even though prices have slipped recently.

"Don't take this blip as significant," Saudi Arabia's oil minister Ali al-Naimi said, declining to give specific price forecasts. "This is a cyclical business. It's not the first time prices go up or prices go down."

Crude oil prices fell below $65 a barrel after OPEC's announcement, and have slipped more than 17 percent in the past month. Oil prices have fallen from $78.40 in mid-July to $64.85 in midday trading today.

Bloomberg News is reporting that oil prices may continue to slide. According to a survey of oil analysts and traders, 48 percent said they expect oil prices to fall this week, citing sufficient U.S. supply.

Don't expect OPEC to stay idle if some members have their say, though. Algeria's oil minister Chakib Khelil said OPEC will "watch the market very closely."

"For next year, we can see already that we have a high build in inventories," said Khelil. "We have signs of recession. And we have a contra-seasonal build, which we haven't seen for a while. So all of these things point to a situation of over-supply."

Venezuela's Energy and Oil Minister Rafael Ramirez warned, "Inventories are above the normal level. We are open to study which are the best decisions to defend the price."

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2. Soros: Housing Bubble to Hurt Consumer Spending

The Houston Chronicle's Loren Steffy interviewed George Soros last week, asking Soros about the housing market, stocks, and oil prices.

Soros, reports Steffy in his blog, says that the housing slump will likely cut into the brisk pace of consumer spending within the next two years. "It's already beginning to cast its shadow over the markets," said Soros.

However, he added that the Federal Reserve's decision to pause its rate-hike cycle could ease the impact. "That may reduce the shock, but I think it's coming," said Soros.

When asked about a bubble possibly forming in private equities, Soros says a boom is not always a bubble. "There is a boom in private equity, but that doesn't necessarily lead to a bust," Soros told Steffy.

Soros also predicts that oil prices will come down in the coming months, but only within normal price cycles. He added that production improvements will help keep prices lower.

"There's an awful lot of investment going on that in a year or two will lead to increased production," said Soros, noting the recent discovery of a new oil field in the Gulf of Mexico.

Editor's Note:

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3. Fed's Minehan: GDP Growth Slowing

The U.S. economy should slow in coming months from roughly 4 percent growth to an expansion in the high 2 percent range, which should slowly ease inflationary pressures, Federal Reserve Bank of Boston President Cathy Minehan said Monday.

Still, she cautioned that inflation remains a risk, and that the Fed should remain "quite vigilant" in containing that risk.

"I see growth for the next year or so in the high 2's, approximately full employment, and core inflation subsiding," Minehan said in the text of remarks delivered to the National Association for Business Economics.

The U.S. economy grew at a 5.6 percent pace in the first quarter and 2.9 percent in the second.

"As near as we in Boston can tell, the best baseline forecast is that U.S. growth will moderate ... to something slightly below its potential of a bit less than 3 percent over the next year or so," Minehan said.

"At this pace, the growth of demand will roughly match that of aggregate supply, and lead to little change in unemployment," she added.

Minehan's forecast suggests that the central bank can continue to keep rates unchanged while it surveys the economic scene. The Fed last month kept the federal funds rate at 5.25 percent, the first pause since the Fed began its credit-tightening campaign in mid-2004. The Fed is widely expected to hold rates steady when it meets next week as well.

One "obvious concern" to the economic outlook, Minehan said, is housing. While she's "comfortable" with forecasts for a "moderate downturn" in residential building, Minehan cautioned that recent data, including "gloomy assessments" by home builders, "remind me that this assessment could well be optimistic."

"There are clear risks to the baseline housing outlook," she said, citing the effect of higher mortgage rates on borrowers, particularly sub-prime borrowers.

Yet Minehan pointed to the fact that home prices continue to grow, albeit at a "much slower" pace, as well as signs that home prices may not have as much of a "wealth effect" as once thought by some analysts. Those factors may limit any downside impact on consumer spending, which Minehan expects to "moderate, not collapse."

Meanwhile, "solid" global growth and robust U.S. productivity should support the expansion, as should business spending, she said.

Regarding inflation, the Boston Fed President, who isn't a voting member of the Fed's rate-setting board this year, called recent trends "not very favorable."

However, she said inflation expectations measures suggest financial markets agree with her baseline forecast that core inflation will "gradually subside" assuming stability in energy prices.

Still, "a key risk is that inflation will continue to rise or persist at high levels and embed itself in consumer and business plans," Minehan said.

"Managing that risk is clearly important, and a matter about which central banks need to be quite vigilant -- as I believe the (Federal Open Market Committee) has been and will continue to be," she said.

Editor's Note:

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4. U.S. Gas Prices Tumble for a Second Week

The average price of a gallon of gasoline in the U.S. has dropped 21 cents in the past two weeks to $2.6598 a gallon, according to the Lundberg survey.

This week's average price for self-serve regular is the lowest since March 24, when gas prices averaged $2.4999.

The survey's editor, Trilby Lundberg, tells Reuters, "High refining capacity use rate and very heavy gasoline imports - both required to meet summer demand - have now met with September's perennial demand drop off, which was accompanied by a sizable drop in crude oil prices."

The end to the summer driving season has the biggest impact on gasoline prices, says Lundberg. When demand falls, so do gas prices.

But crude oil accounts for about half of the price of a gallon of gas. Crude prices have dropped 17 percent in the past month to below $65 a barrel today (see above article). If they continue to plummet, gas prices could fall even more.

Lundberg doesn't expect gas prices to fall at this magnitude in the near future, but qualifies that forecast.

Says Lundberg, "If there are more gasoline price cuts, they are likely to be much more modest. The big change has been coming out of our high gasoline consumption season. Only dramatic crude oil price cuts, beyond what we have seen, would allow this pace of price cutting at the pump to continue."

Lundberg adds that a sharp slowdown in the economy could drive prices lower.

Editor's Note:

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Editor's Notes:

In April 2004, Financial Intelligence Report predicted that oil prices would skyrocket from $29 per barrel to over $60 within a year. That forecast was dead-on. Our investors made a fortune on that advice. Since then FIR has been warning that oil prices would collapse in the next 12 months and could go as low as $40 per barrel. Discover the top 5 ways you can profit from the coming Oil Bust. It's already begun! Go Here Now.
One expert tells Financial Intelligence Report that housing prices nationwide could fall by as much as 40% over the next few years. Find out how the five ways to protect yourself and profit from the coming real estate crisis. Go here now.
Sidestep the slumping economy. Discover how to invest in sectors the smart way. Go here now.
Learn how you can triple your money with energy investments. Go here now.
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