$135 Oil, Airlines Jack-Up Prices, Fed Speak Translated, The Booming Art Market, and More!

Oil stole the headlines again yesterday… not because Congress was berating oil execs on the Hill. The showstopper was a whopping $5 increase to an already rampaging oil price.

The rally got started in earnest after the Energy Department said U.S. inventories had declined by 5 million barrels. Traders were expecting a million barrel increase. Then dollar weakness set in and — boom! — oil at $135.

“The Peak Oil viewpoint is establishing a beachhead in the futures markets and supporting high prices,” comments our resident oil industry analyst Byron King. “Greed and fear are just plain hitting the fan on this one.

“Veteran oilman T. Boone Pickens has been beating the drum on this topic for quite a while. ‘All the world can produce is 85 million barrels of oil per day,’ Mr. Pickens told me at a conference in Houston last October. ‘But the world demand is nearer 87 million. Something has to give. It’s the price.’

T. Boone has repeated that comment many times since.

“Apparently,” says Byron, “the markets are listening. On a large scale, investors are shifting their energy focus from the short to the medium term. Beyond the medium term, fears for future oil supply dominate.”

Since January 2008, long-term futures oil contracts, such as those for delivery in 2016, have jumped almost 60%. Near-term prices have gone up 35%.

Yesterday, traders boldly priced the December 2016 contract at $140, the first time that price has ever been reached. The same contract was trading at $131 at the market open yesterday… it rose $9 a barrel in one trading session.

Our man Byron is the editor of Outstanding Investments, the newsletter Hulbert Financial Digest gave its No. 1 rating for coverage of the oil and resource markets. That’s the most highly coveted rating in the newsletter business, and something we’re quite proud of. If you’d like advice on investing profitably alongside the rising cost of oil, you can do no better than Outstanding Investments. Read more here.

Gasoline prices spiked yesterday too. The national average shot up 3 cents a gallon, to $3.83 for the cheap stuff. Per usual, diesel drivers are really getting the shaft… the national average for their fuel of choice is up to $4.59.

That’s the 15th day in a row of record high gas and diesel prices.

As you know, head honchos from BP, Shell, Chevron, Conoco and Exxon suffered though their now-monthly testimony before Congress on Wednesday. Senators from both sides took their shots, all sounding something like:

“People we represent are hurting,” the whiny Sen. Pat Leahy of Vermont said, “the companies you represent are profiting.” Senators asked oil execs important questions like how much money they personally make each year and how they can live with their “corporate consciences” when Americans “can’t afford to drive to work.”

The senator even brought nifty charts:

Sen. Leahy made a stop at Kinko’s before the hearing

“We cannot change the world market,” responded BP’s Chairman Robert Malone. “Today’s high prices are linked to the failure both here and abroad to increase supplies, renewables and conservation.”

“I don’t think we can control OPEC,” added Peter Robertson of Chevron. “I don’t think it is our place to control OPEC… there’s not much spare [production] capacity in the world. OPEC doesn’t have much spare capacity to change the supply.”

The CEOs were verbally whipped. Congress got their chance to spew populist rhetoric while the cameras were rolling, and not one, not a single piece of policy emerged. We wonder… where were these hearings when oil was at $15 just nine years ago and the Big Oil companies had to finance operations?

And… how many more before oil companies just pack up and leave, a la Halliburton? We doubt they’ll be publicly flogged in Dubai or Singapore.

Hmmn…

Maybe next month Congress will grandstand in front of a battery of airline CEOs. That will be equally as gratifying.

American Airlines announced yesterday that checking a single bag on a domestic flight will cost you an extra $15… each way. American’s new policy arrived only two weeks after most major carriers (American included) added a $25 surcharge for checking a second bag. Other airlines have already hinted they will match the new fee.

“Our company and industry simply cannot afford to sit by hoping for industry and market conditions to improve,” American chief Gerard Arpey said, commenting on the new fee.

True to Byron King’s “Silent spring” prophecy , American also announced it will eliminate 12% of available flights — as many as 500 — by the end of the year. The company promised to ground, sell or retire as many as 85 planes, and an untold number of American employees will be fired.

American Airlines stock, by the way, is looking awesome. It shed 25% yesterday alone:

Given the price of gas and air baggage fees, for the first time since 2002, fewer Americans plan to travel over Memorial Day weekend than the year before. Twelve percent of the U.S. population, says AAA, will travel this weekend, down 1% from last year.

Gas prices are up 19% since Memorial Day 2007. The average car rental is up 45%, average airfare up 8% and typical economy hotel room up 9%.

The Federal Reserve will avoid cutting rates again “unless economic and financial developments indicated a significant weakening of the economic outlook.” That proved to be the key sentence from the FOMC’s April minutes, released yesterday.

Bernanke and his brood took on their most hawkish tone since the beginning of their rate cutting cycle, saying that “Indicators of inflation expectations have risen in recent months… uncertainty about the inflation outlook remains high. It will be necessary to continue to monitor inflation developments carefully.” Fed governors Fisher and Plosser actually voted against the Fed’s late April cut, warning that “Another reduction in the funds rate at this meeting could prove costly over the long run.”

When deciding policy adjustments in the future, the Fed declared, the FOMC will consider downside risks to both growth and inflation. But still, if forced to choose between the two, the Fed hinted that the dollar would remain on the backburner: “An additional easing in policy would help to foster moderate growth over time, without impeding a moderation in inflation.”

The Fed also lowered growth projections for the year… again. U.S. central bankers think the U.S. economy will grow somewhere between 0.3-1.2% this year. At the same time, the FOMC raised inflation expectations to as high as 3.4% this year.

U.S. stock indexes sold off as a result. The market was already under pressure from $133 oil, and the Fed minutes proved to the last straw. After the FOMC’s 2:00 release, it was all downhill:

Looks like the market wanted more seductive whispers from behind the Fed’s closed doors.

As the stock market looks as uncertain as ever, the market for coveted art is hitting all-time highs. Sotheby’s spring contemporary art auction last week netted $362 million in sales, a company record. The auctioneers also sold off the single most expensive piece of art in company history… $86.3 million for a 1976 Francis Bacon triptych (fancy word for three-paneled art).

The dollar index plunged into the 71 range yesterday, recovering slightly this morning, to 72 even. The euro, pound and yen were all flat.

Gold stayed put too. It’s at $920 while we scribble.

“OK, I have to confess to working for an oil company,” writes a reader. “I’m currently in Russia waiting on the weather to clear so I can return home from the oil patch. What many of your readers don’t understand is oil is getting harder to find and needs quite a bit more cash outlay to get to it. I’m sitting on a piece of innovative technology offshore that up until a few years ago would have been impossible. It takes years to test new ideas and designs. We have icebergs whizzing by us so fast it makes your head spin (not all of them miss). I must admit this is one of the most remote places in the world I have ever been in.

“But I also get a chance to travel on many different airlines and to many different places, and my observation is the U.S. is falling way behind. While the U.S. air carriers are losing revenue and restructuring, the Asian carriers are expanding and account for most of the new aircraft sales. They also don’t appear to be canceling any new airplane orders anytime soon. It has also been an observation that the shipyards I’ve worked in over here in Asia cannot build container ships fast enough. You can count on one thing, though: Those new ships will be calling on the U.S. ports empty, with the current trend of the dollar.

“You think oil and gasoline are high. The day of the cheap stereo or TV set is over. It’s the raw materials and who has them that will drive the global market.”

The 5 responds: That’s the first problem with the “energy crisis” in America… why should you have to “confess” to working for an oil company? Sounds like a terrific way to make a living.

“Option ARMs have been around for 25-plus years,” writes a reader, helping us clarify yesterday’s 5, “having first been offered during the 10-20% interest rate days of the early 1980s era. Many of the ‘prime’ lending types have actually performed well over time.

“Sadly, the subprime lending sources four-five years ago somehow concluded that these products would be very helpful to borrowers with weak or marred credit histories. Oh, and they offered most of them with ‘no income verified’ documentation, and some without even verifying the assets stated on the applications. I’m sure they were thinking only of the ‘beneficial’ low payments these loans provide, and not the money they would make by selling these loans into a market. Or that they could, as a result, expand by three or four times, due to the easier qualifying rates they offered to go along with them. Nah….

“The truly sad part is that when this product was introduced through the subprime channels, it came with even higher margins than the prime versions, making for greater risk of faster, and more painful, ‘resets.’ Brilliant thinking by the banks. Essentially, they increased their initial profits on the cost of their borrowed funds. They looked good to shareholders for the first year or two, amassing lovely bonuses and stock performance payouts and options gains for the brass. In the process, they actually sped up their risk tables, and dare I say their ‘doom.’ To say nothing of borrowers.

“Does anyone think long term anymore in this society of ours?”

The 5: Not us. We have only 5 minutes.

Cheers,

Addison Wiggin
The 5 Min. Forecast

P.S. The reopening of the “Chafee Royalty Program” after six years is proving to be quite a popular item among your fellow readers. You may want to read here to find out why.

P.P.S. Bruce tells us we have less than 150 seats left for the conference and they’re filling up at a rate of 40-50 a day. If you want to join us in Vancouver… better step on it.