Focus on Fuels | Colorado Corn

Week's Action an Anomaly

By Gary Wilhelmi
DTN's Man on the Floor of the CBOT, CME

We experienced a bit of a disconnect in the petroleum complex last week as crude bulled to new highs at over $84 per barrel while gas at the pump languished. But don't count on this oddity to become the new law of the trading jungle.

What happened in gas was just a post-Labor Day, natural tail off in gasoline demand as it is back to school and no more vacation travels. While these two petroleum products pulled in different directions, the heating oil began to heat up for winter demand. No one really knows what the winter may be like, but we all know that it is going to be cold and -- at $84-plus per barrel on the crude -- awfully expensive. The petroleum complex has demand dynamics similar to the soybean complex, only it is like soybeans on steroids -- a wild and crazy set of markets.

The inflationary risk of oil prices is attracting the attention of the Gold Bugs who speculate in the gold market. As crude nosed up into the $80s, gold went to 28-year highs. If oil does indeed go up to $105 per barrel, as many feel it will, the inflationary implications will be striking. Alan Greenspan has just released a new book in which he sees oil going up to $120 to $130 per barrel. Needless to say, the resultant $5-plus gasoline prices would have the inflationary storm flags flapping in the breeze.

Speaking of breezes, it does not seem to be very windy where I live in Northwest Indiana. But there is enough of a breeze for windmill farms to pop up, nearly 300 feet tall, near Lafayette. There are only three such installations in Indiana now, but the arrangements for the farm leases look appealing and the demand for power from major power companies is a mighty fine hook to hang your profit hopes on.

Similar installations have drawn the ire of environmentalists out in California as windmills on the west slope of the mountains are also on the main fly way of the endangered condors. Well, that is not a problem in Indiana. We are Condor free and pigeons don't have many environmental fans.

The cut in fed funds and the discount rate by 50 basis points was extreme and the result on the troubled U.S. dollar was punishing. More cuts are likely given the history of rate cutting forays. So down shall go the dollar and then up will go the inflation-sensitive gold -- perhaps to $1,000 an ounce. That's speculation, of course, but it is based on a pretty aggressive rate cutting pattern set off by the Fed. What concerns many of my mates on the exchange floor is not that the Dow went up 345 points the day of the interest rate adjustment announcement, rather it is that the abrupt drop in rates indicates that the Fed thinks the economy is in worse shape thann any of us thought.

Gary Wilhelmi can be reached at gary [dot] wilhelmi [at] dtn [dot] com

(CZ)

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