Oil Prices Pennies Away from Support

(Headlines - scroll down for full stories)
1. Oil Prices Fall to $67
2. Recession Coming?
3. Productivity, Fed's Favorite Indicator, Slips
4. ADB: China to Grow 10.4 Percent

1. Oil Prices Fall to $67

Crude oil prices fell to a low of $67.77 on Monday and remained under pressure this morning, just pennies from a key support level. The close of the summer driving season and calm tropical winds in the Gulf are putting pressure on oil prices.

In addition, diplomacy between the U.S. (through the U.N.) and Iran over its nuclear intentions is quelling fears of a disruption in production.

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The key support for crude is the 200-day moving average, which is around $67.50, Reuters points out. If crude drops below $67.50 look for traders to start selling the commodity.

"The market has been very technical. If we break these levels, there is room to go much further down," said Olivier Jakob of Petromatrix to Reuters. "It's hard to see where support is going to come from."

The only thing that could buoy oil prices is a change in these factors. For instance, a new hurricane emerging and threatening the Gulf. However, this year's hurricane season has been calm compared to last year's devastating blows from Katrina, Wilma, and Rita. A tropical storm developing in the Atlantic right now is not expected to come close to Gulf oil platforms.

The wild card is Iran. If Iran refuses to cooperate with the U.N., U.S. oil consumers could pay the price.

"Barring some developments in the Iranian nuclear dispute, the market is likely to remain range-bound for today's session with a base of $66 a barrel," said Paul Harris, an analyst at Bank of Ireland Global Markets to the Associated Press.

Another short-term threat to low oil prices is a surprise in the inventories data tomorrow. Analysts are expecting both oil and gas supplies to drop. A Reuters poll shows that experts are looking for a 400,000 barrel fall in gasoline inventories and a 1.4 million barrel decline in crude stockpiles when the government releases its latest data.

Meanwhile, a Dow Jones Newswires poll of analysts predicts crude oil stocks to fall by 1.1 million barrels and gasoline inventories to decline by 600,000 barrels.

But, the end of the summer driving season also reduces the impact that low gasoline stocks have on the price of crude. Instead, analysts look more at the heating oil supplies as winter nears. Both Reuters and Dow Jones analysts expect a 1.2 million-barrel build in distillate stocks.

Stay tuned.

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2. Recession Coming?

Does an inverted yield curve necessarily mean that there's a recession coming? A new paper by Federal Reserve Bank of New York economists Arturo Estrella and Mary R. Trubin makes a compelling case.

In "The Yield Curve as a Leading Indicator: Some Practical Issues," Estrella and Trubin quantify a connection between the yield curve and the economy. The authors looked at the Treasury 10-year constant maturity rate and the secondary market three-month Treasury bill rate on a bond equivalent basis.

The author's findings are "all six recessions since 1968 were preceded by at least three negative monthly average observations in the 12 months before the start of the recession," they wrote in the paper.

Bloomberg's Caroline Baum points out that this past August was the first time that the monthly average fell into negative territory. When long-term rates are below short-term rates, it's known as an inverted yield curve.

"The negatives tend to come in bunches," Estrella said to Baum in a phone interview last week.

"The inverted curve can be viewed as a reflection of monetary policy (the Fed raises short rates, slowing growth and reducing inflationary pressure and long-term rates) or investor expectations (of lower short rates), according to Estrella," says Baum.

The way to reverse an inverted yield curve is for the Fed to either lower short-term rates or hope the markets push long-term rates higher. But the Fed, despite a pause at its last meeting, shows no signs of wanting to pull back the federal funds rate, its key interest rate that determines short-term rates. Instead, some Fed officials are arguing to continue the rate increases.

We'll see if that's the case over the next two months.

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3. Productivity, Fed's Favorite Indicator, Slips

The productivity of American workers slowed in the spring while wage pressures increased.

The Labor Department said that productivity, the amount of output per hour of work, increased at an annual rate of 1.6 percent in the April-June quarter, was slightly better than the 1.1 percent increase estimated a month ago but down from a 4.3 percent growth rate in the January-March period.

Wages registered a second sizable increase, rising at an annual rate of 4.9 percent in the second quarter, up from an initial estimate of a 4.2 percent increase -- good news for workers, but the kind of development that leads the Federal Reserve Board and economists to worry about inflation.

The second quarter increase followed an even larger 9 percent surge in labor costs in the first three months of the year, which was the biggest quarterly increase in nearly six years.

The first quarter figure was up sharply from a previous estimate that labor costs were rising at a much more moderate 2.5 percent rate in the first quarter. Labor Department analysts said the increase reflected more complete wage data.

While rising wages and benefits help workers, economists see the combination of slowing productivity and rising wage costs as a recipe for unwanted inflationary pressures.

The sharp jump in labor costs raised worries on Wall Street that the Federal Reserve may not be finished boosting interest rates to fight inflation. The Dow Jones industrial average was down by more than 30 points in mid-morning trading.

Nariman Behravesh, chief economist at Global Insight, said that rising wage costs at a time of slowing productivity would put policymakers at the Federal Reserve "in a very tough spot."

But other economists saw an upside to the jump in wages, saying it would help consumers keep spending in the face of rising energy costs, higher interest rates and a cooling housing market.

"If households are bringing home larger paychecks, then consumer spending can hold up in the face of ugly headwinds," said Stephen Stanley, chief economist at RBS Greenwich Capital.

In a second report Wednesday, growth in the service sector, where most Americans work, accelerated in August. The Institute for Supply Management, an industry research group, said that its index for non-manufacturing industries stood at 57.0 in August, a better-than-expected reading, and up from 54.8 in July.

Productivity is the key factor determining rising living standards. Strong growth in output allows businesses to pay their workers more without having to raise the cost of their products, which fuels inflation. But the current numbers raise concerns because they show wage pressures rising as productivity growth slows.

The Fed often has cited rising productivity as a reason to believe that inflation is not getting out of control.

Fed policymakers last month took a break after two years of 17 consecutive interest rate increases, sending a signal that they may have done enough to keep inflation at bay.

Most economists believe the Fed will remain on hold at their next meeting on Sept. 20. But some analysts believe the Fed will be forced to raise rates one or possibly two more times later this year in response to worsening news on inflation.

Productivity growth, which had been weak for two decades, began to rebound in the mid-1990s, reflecting the benefits produced by the spread of computers in the workforce.

In a speech last week, Federal Reserve Chairman Ben Bernanke took issue with economists who believe this productivity rebound will not be long-lasting.

Bernanke said he believed a case could be made that "the strong productivity growth of the post-1995 era is likely to continue for some time."

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4. ADB: China to Grow 10.4 Percent

The Asian Development Bank boosted its 2006 growth forecast for China to 10.4 percent.

The banks latest forecast is up from a 9.4 percent prediction in April. The bank says China's surging investment and exports are behind the country's spectacular growth.

China's economy grew an impressive 11.3 percent in the second quarter of 2006, it's highest rate in a decade, says the Associated Press.

However, the bank also warned that China's economy could overheat.

"If the current investment boom continues and leads to chronic overcapacity, achieving balanced and sustainable long-term growth could become somewhat problematic," the ADB said in a report.

"The report warned that China's rapidly rising foreign reserves and high capital inflows ‘can undermine the impact of higher interest rates,'" says the AP.

The country is attempting to cool down its economy. This year, China's central bank raised interest rates twice and enacted curbs on real estate development and other investments.

The bank acknowledged China's efforts to rein in its rapid growth, but says it falls short in some areas.

"The Chinese authorities have been introducing measures to reign in overinvestment and overheating," Masahiro Kawai, head of the ADB's office of regional economic integration, told reporters in Hanoi, Vietnam. "Maybe some other measures may be desirable. At the same time, also to implement these measures at the local government level would be quite important."

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.
Hedge fund investing lets you protect your wealth without investing in a single stock. Go here now.
Discover how to outperform stocks by 500% this year with one of the safest investments available. Go here now.
Beat the S&P every time. Learn how to invest in sectors the smart way. Go here now.
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