Posts Tagged ‘oil’

As oil lingers below $40 for a barrel of crude and heads toward $30 , the world seems to have turned upside down. It was only six months ago that we were accepting that oil,  hovering near $150 per barrel,  would soon be at $200. Now while contemplating $30 oil we can see the benefit at the pump when we fill our tanks with gasoline below $2 per gallon.

As oil, the most visible of commodities has declined,  the bubble has burst as well for a host of other commodities. The rapid increase in the cost of commodities forced most companies to raise prices and sent consumers scurrying for shelter from the fall out of higher prices.

The good news for consumers,  is that they will continue to feel relief at the pump for the foreseeable future however, with the exception of eggs, milk and some proteins,  it is unlikely that consumers will see lower prices in other consumer products. Manufacturers, having been able to raise prices, will  use this period of reduced input costs to improve margins in a period when unit volumes may show some declines.

This should result in some favorable earnings suprises in the consumer products goods sector as 2009 progresses and continue as revenues normalize later in the year. It should be particularly favorable to food companies as transportation costs and base commodities decline.

 Consumers continue to shift their food dollar toward more meals consumed at home reversing a trend that had dominated the food industry over the last three decades where meals eaten away from home grew consistently.

Supermarket Retailers and traditional branded and private label ingredient and prepared food companies stand to benefit most from this dramatic shift in purchase trends as consumers seek comfort from eating at home. Investors may be wise to take note.

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The price of a barrel of crude oil fell below $37 today. Despite the OPEC decision on Wednesday to further reduce oil output by 2.2 million barrels per day, oil has tumbled to a level not seen in nearly 5 years. It was only a few short months ago, that speculators triggered a run on the oil market, that drove the price of a barrel to nearly $150 and generated gasoline prices well in excess, of $4 per gallon, in most areas of the country.

The ripple effect of these extraordinary fuel costs were resounding and ripped through the economy, shredding transportation budgets at corporations and swallowing big gulps of discretionary income from consumers. SUV’s and other gas guzzlers were garaged, sold at significantly reduced prices or were parked in dealers lots collecting dust. Politicians promised numerous solutions via alternative energies, while smart cars and hybrids became more visible on our roads and highways. 

The effect on the auto industry has been devastating. The spike in a barrel of crude oil and a gallon of gas gave way to continued erosion in the housing market and pending implosions in the financial markets, as well as a crash in the stock market. Most Americans that own assets have seen a significant decline in asset valuations during the economic realignment of 2008.

The bright light for consumers and corporations is the rapid decline experienced in fuel costs over the past several weeks. The irony of course is that as fuel costs have declined an inverse relationship has existed in the auto industry which has General Motors and Chrysler Corporation teetering on the brink of a possible government organized bankruptcy. Now we can fill up our tanks at less than half of what it cost over the summer. It is likely however, that in the future,  the tank we are filling may not be in a vehicle manufactured by one of the Big 3 auto makers.

Last week, when the Senate failed to support a bill to provide bridge financing to the auto makers the White House indicated that they would step in and save the day. The presumption being that TARP funds would be made available to assist the auto industry with some short term cash needs, until the new administration, along with the aid of  Congress,  would provide longer term support for this ailing industry.

Now we are hearing the word bankruptcy from the President in reference to the auto industry dilemma. Even an orderly bankruptcy has the potential to generate an ugly chaotic effect on the economy. At this time, the White House needs to drive a decision to either support an auto bail out with TARP funds or crawl to the curb while these former bastions of American enterprise reorganize under bankruptcy and the American economy is dealt another blow.

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