On the morning of July 15th, the price of crude oil, the most widely watched
commodity in the world, was gyrating in a narrow range, just above $145 /barrel,
as dealers in London were position-squaring ahead of the Nymex opening. Just a
few days earlier, Iran was conducting war games in the Persian Gulf and
threatening to shut down the Strait of Hormuz, if attacked. The world watched a
fireworks display of Iranian Shahab-3 missiles that were armed with one ton
explosives.
In the background, the global stock markets were entering into bear market
territory, having lost $13 trillion of value since their peak set last October.
Soaring energy and key raw material costs were squeezing profits of
manufacturers, unable to pass the entire cost increases onto consumers, who were
themselves getting squeezed by soaring prices for gasoline, food and other basic
necessities.
IndyMac Bank, a prolific mortgage specialist, was seized by federal
regulators, in the third-largest bank failure in US history. Preferred
stock sold by Fannie at $25 /share fell to $14 lifting its yield 13.50-percent.
Lehman Brothers' preferred stock plunged to $9.50 /share to yield 20.8%,
discounting its eventual demise. General Motors suspended its common stock
dividend. Hedge-fund trader George Soros said the global banking
turmoil is "the most serious financial crisis of our lifetime."
On July 15th, the Dow Industrials plunged 250-points in the first-hour of
trading to an intra-day low of 10,825, extending its losses to 2,400-points,
from eight weeks earlier. Where was the US Treasury's "Plunge Protection Team"
(PPT) with its magical safety-net, designed to rescue Wall Street during moments
of gut wrenching panic? "Helicopter" Ben Bernanke was handcuffed by a weak
dollar and gold hovering near $1,000 /oz, and couldn't slash interest rates to
rescue the market.
US consumer prices were increasing at a 5% annual clip in June, reflecting
the global commodity boom that the Fed's rate cuts had set in motion. Then
suddenly, at 10:30 am EST on July 15th, a miracle happened, the Nymex
crude oil market began to collapse, plunging $10 per barrel within a span of
less than one-hour, to its biggest daily decline in 17-years. What was
behind the historic crash in the crude oil market on July 15th that prevented
"Black Tuesday" on Wall Street?
A few hours later, at 11:30 pm EST, the Bush administration announced a shift
in its foreign policy, and said it would send a high ranking envoy to Geneva,
Switzerland to talk with Iran's diplomat directly, about Tehran's nuclear
program. As long as the diplomatic game continues, there is less chance of any
military action against Iran's nuclear weapons program. At a cost of one
round-trip airline ticket to Geneva, Washington engineered a stunning 15% drop
in world oil prices.
On July 16th, Nevada Senator Harry Reid fashioned a bill to rein-in
speculators in the energy markets, who bet on the price of oil, but don't intend
to take physical delivery. "This bill will address the rising cost of gasoline
in the short term, and prevent Wall Street traders from gaming oil markets, and
insure that American consumers are paying a fair price at the pump," Reid said.
The bill would restrict the number of oil futures contracts an
individual speculator could control.
Oil prices have tumbled more than $23 a barrel from their all-time
high set on July 11th, marking the biggest decline in dollar terms in the
market's history. The evaporation of the Iranian "war premium" from the oil
market, rescued the Dow Jones Industrials with a "miracle rally" of 800-points,
from the brink of Armageddon. But could there be another hero who is responsible
for the historic slide in crude oil, besides the backroom cabal at the US State
and Treasury departments?
No market travels in a straight line. In the second half of 2006, the
crude oil market fell by 35% to as low as $50 /barrel, before hitting bottom in
January 2007.
