The following is a market commentary (my opinion, not financial advice) that I sent to the Investment Analysis Group today.

Hello IAG Members,

It’s Eddie, your internal VP and part-time market analyst. It’s been awhile since I’ve been making a commentary on the market, and the last “big” commentary was on the precursors of the Jan. 21st panic. Since then, I’ve been getting several emails pushing me to speak my word, but I’ve been hesitant, mostly because I’m no longer trading actively, since SDR Fund Management is now in the process of acquiring a CFP firm (and had to liquidate all our funds to begin the merger process), thus I’ve been a little, “out of the loop.”

However, I will comment something that I’ve been warning about since Oct of 1999. Oil, Oil, Oil. Oil is king. It is the fuel of progress, from utilizing it to push turbine engines for electricity for the power grid, to the gas that powers the trucks that move our merchandise. The bottom line is that a substantial increase in oil prices if continued over many, many, quarters will have a dramatic affect on operating costs for firms.

This is especially true now, as we see balance sheets being affected by the price of oil… Look at the charges that companies have been taking, most notably Consolidated Edison, which levied a nasty surcharge of 89% extra ontop of all electricity bills. Gasoline has been the highest it’s been in 10 years, but it didn’t hit the 330% high back in February.

But what about the Federal Oil Reserve? Ok, as you know the US govt. holds over 100 million barrels of oil in reserve for war time purposes, mainly because that is the only raw material that the US can’t provide itself with. The govt. has given subcontracted the right to sell this oil in the usual way - by bidding. 3 agencies have won the bid, but according to ABC News, all of them are home businesses, who ironically have ZERO experience in the dealings with oil. 2 of these agencies are literally home-run, inside a house, with only one record of an employee on the payroll. The last one, actually has a staff, but has already used himself as an agent to sell the allocated 30 million barrels right to US Oil companies. So how will this alleviate the problem? It simply doesn’t.

What about OPEC’s promise to pump more oil? Well they did “pump” more oil. You see OPEC’s rules on the “pumping” of oil by accounting standards are a bit sketchy. Under OPEC guidelines, “pumping” need not be the actual pumping of oil from the ground, but includes barrel transfers from one storage unit to the other. So yes, they did “pump” more oil, but they didn’t increase the monthly allocation of oil to the world. This is why oil has yet to fall a significant amount.

As for the Jerusalem battles, although it might make the futures up in Chicago a little wacky for the next few days, unless the battles escalate, there’s nothing to worry about. OPEC has also assured that oil would continue to flow and no embargo’s on the US would follow if war should break out.

So what to expect from here? Oil will increase. Remember back in 1998, when oil was at a record low? We had a particularly unforeseen cold winter that year. Due to that, heating oil wasn’t portioned of correctly from the crude oil. As a result, both heating oil and gasoline skyrocked up 70-80%, triggering the first hike in oil that started off the chain reaction we see today. Likewise, today we have been so concerned with the price of oil and gasoline, that we can expect a major hike in the price of oil and heating oil due to unforeseen planning of heating oil partitions. And as I have said before, if this happens again, expect repercussions on the bottom lines of balance sheets to be hit as early as two quarters later.

Well, this is off the topic, but the reminds of an analogy from medieval warfare. When an army lays siege to a fortress, what they do first, is to let them exhaust all their precious resources first. Looking at the situation today, we are finally opening the resources of our oil. If a few countries banded together and declared war on us, we may be in some serious trouble. Of course it’s all in the hypothetical sense, but as Jerusalem escalates, it’d be interesting to see where this would go.

If you have any comments, do not respond to this email address, but please email me directly at ejs211@stern.nyu.edu

Best Wishes,
Edmund J. Song