As we’ve watched the recent rally unfold, it has made total sense that falling oil prices would be the fuel. Lower oil and gasoline prices are politically favorable and benefit politicians as they come with hat in hand to beg for votes come November. What caught nearly everyone by surprise though was the trigger for the rally. It wasn’t some big news event. It wasn’t some fundamental change. It certainly wasn’t the explicit guarantee from Secy Paulson that the government would sop up whatever worthless debt Fannie and Freddie have on their books with fresh, unbacked Dollars.
Rather, it took the SEC’s announcement that it would selectively enforce a standing rule and ban naked shorting of the financial stocks for 30 days to throw this temporary floor under the embattled sector. The rout of oil has added fuel to the fire. However, sooner or later, myopic traders will figure out two things:
a) There are still a ton of problems to befall the financials – this crisis is nowhere near over;
b) if our oil prices get too low, the supplies will go elsewhere.
Remember the demand is 87 million bpd, supply is 85 million bpd. Despite media assertions otherwise, US demand has not fallen off that much. 4.3% to be exact since Memorial Day weekend and almost all of that falloff has been in jet fuel. Gasoline demand is flat, even at $4/gallon. This type of environment does not support a sustained decrease in price, much to the chagrin of those betting on the banks.