As it seems I have no “normal” hobbies, I tend to do a lot of reading about the financial markets (finance, commodities, stocks) and I feel safe saying most people have no clue just how low gas has potential to get in the next few months.  While this low will be temporary, you still will be surprised.

Essentially, the bottom has fallen out of the entire commodities market.  Metals, Oil, Natural Gas and Agricultures are falling as if people will never need to drive, build or eat again.  For example, the price of oil has fallen from almost $150 this past spring to roughly $40 this past Friday and, obviously you’ve see the price of gas at the pump fall too.  All of this can be tracked back to the recession; the “pop” of the speculation bubble and the financial melt down.

Historically there is roughly a 6-week lag between the price of oil and the price of gas at the pump.  So, while oil has dropped $25 in the last month (from roughly $65 to $40) the price of gas still has more room to drop.  Based on the close price of oil today ($40), one could reasonably expect to see the U.S. average for a gallon of gas to drop to around $1.35 within the next 4 to 6 weeks.

As with all things financial market related, market “corrections” tend to over swing both ways.  Oil at $150 was way too high for current condition and supply (part speculation bubble) and oil falling like a rock is the correction of that bubble.  Where is going to stop, no one knows… but if it continues to fall, say to the level of $20 per barrel, the U.S. could see $.99 for a gallon of gas once again.

This could change at any time – an unexpected war, production interruptions, terror attack – but as long as oil continues to fall hard, gas is going to follow.

Think I am making this up?  Jan 09 Unleaded Gas Futures are now at .90

Another day is upon us, as is another Bailout bill. The Senate will vote this evening (7:30 Eastern) on a bill that is essentially the same except that it includes raising the FDIC insurance limit to $250,000 per account, up from $100,000, as well as the addition of a $8 billion tax cut for hit by natural disasters in the Midwest, Texas and Louisiana. Is this what the bill needs for Republicans to support the effort? If it passes the Senate, will the House pass the bill as well?

Wall Street seems to be asking the same questions as well as volatility is high in this trading session. The DOW is currently down 135 points, off session lows, trading at 10,713. As if the bailout wasn’t enough for traders to be worried about, more “mixed” financial data was released today, which may be adding to the down market.

Mixed, you ask? Yes – mixed. The manufacturing index fell to 43.5% in September, which is mighty close to indicating a recession, and mortgage applications plummeted 23% from the previous week. However, yesterday consumer confidence posted an unexpected rise and only 8,000 jobs were lost in the private sector for the month of September when Economists were forecasting a loss of 60,000.

While the stock market is quite volatile these days, and the credit markets are virtually frozen, I am starting to ask the question if the bailout is truly necessary. The world didn’t end when the first bill failed, business still went on, and there were not long soup lines… Yes, we will see the long term pain by not opening up the credit markets, mass bankruptcies and unemployment could be witnessed in the very near future but maybe that is what needs to happen…

I still view the whole situation as a correction, not a collapse and, as such, I am starting to waiver on the need for the bailout.

UPDATE: a few interesting tidbits

Want to see possible evidence the economy is slowing, the US has higher than expected crude supplies – translation: less oil is being used by consumers.

Investors are skeptical of the vote taking place this evening and they should be!

Another hedge fund hit this skids this past weekend. The famed Ospraie hedge fund is shutting down its main investment vehicle after a 27% drop in fund value in the month of August and a total of roughly 38% for the entire year. While hedge funds are the unregulated playthings of the rich, often open to individuals with large personal fortunes, the investments are often very risky due to a lack of diversification.

In 2008 a number of funds closed their doors due to investments in mortgages, bad mortgages to be more specific, but the Ospraie shuttering opens a the gates for a new type of collapse – commodities. The feared commodity bubble may have popped and, as a result, investment firms with energy, mining and natural resources are starting to absorb heavy losses.

Plain and simple, there bets didn’t pay off and now they need to pay the bookie. As with banks closing, welcome to capitalism!

9/4/08 Update – MSN Money has a story on the situation as well

9/5/08 Update – Ospraie may have bet to much on Natural Gas