Tuesday 30th August 2005 AD
"THE CRISIS OF KATRINA" 

Over the weekend the oil price blasted over $70 and predictably on Monday our office was swamped with more questions, "how high can the oil price keep climbing, when are we going to get some relief from these prices?" 

"Oil surges over $70 as Katrina churns through Gulf" read late Sunday's Reuters newswire. But is there more to this market than a hurricane loose in the Gulf of Mexico? 

" Now what's important is supply and demand of energy" writes Anglo Energy Fund's Justin Pettett today, "one hurricane in one part of the USA can jump oil prices $3-4 dollars almost overnight! It shows you how fragile the supply of oil is." 

Justin's comments are interesting because he is pointing to a far larger problem. For sometime now we have been saying that the 'energy pricing mechanism' is showing all the signs of a market under EXTREME supply/demand stress. 

The world produces and consumes around 83 million barrels of oil per day with the Gulf of Mexico producing around 1.5 million of those barrels. Hurricane Katrina is expected to take, at worst-case scenario, 1 million barrels offline or just 1/80th, yet prices explode close to 7.5% on the news, while natural gas was up 20%. 

While the Crisis of Katrina will pass, what will remain is a market that is increasingly exhibiting all the signs of extreme supply/demand stress and irresolvable structural problems. Going forward it is a market where the pricing mechanism will continue to OVERREACT to BAD NEWS and UNDER-REACT to GOOD NEWS. 

What does that mean to you and I? As Justin finishes off "isn't it good to know that by being properly educated, and investing in a "needs based investment" like the Energy Fund, we are able to profit from this and other natural occurrences." 

Best Regards - Philip Judge pjudge@anglofareast.com