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Oil price collapse: good or bad for Cat?

The New York Times notes that oil and gas projects around the world are being canceled because of the collapse in oil prices. This chart tells the tale:

Classic boom and bust pattern. Credit: Credit:

Classic boom and bust pattern.

Last year the story was we were running out of oil. This year the story is what we going to do with all this oil nobody wants? The spike in prices earlier this year had little to do with the supply of oil and everything to do with the supply of oil futures contracts — oil demand had inched up a few percent, but oil futures demand went through the roof because so many other investments were going south: Oil was merely the last bull market to give up the ghost before the bear took over. The massive deleveraging of the past couple months wiped out everything in its path as Wall Street players craved cash at any cost.

Falling oil prices drove inflation to a record low in November, the Times reports. The problem with the oil crash is that it has infected other commodities, many of which must be carved from the earth’s crust with Cat equipment. Cheap fuel helps Cat, its suppliers and its customers cover their energy costs, but if nobody wants the aluminum, steel and other earthly stuff most deeply implicated in Cat’s business, Cat has problems.

This is the crux of the Cat downgrade at Goldman Sachs last week. Cat’s stock looks cheap (Jim Cramer calls it a buy under $40) but its prospects are cloudy in a slowing global economy that’s punishing demand for drilling and mining.

(More on the consumer price index numbers at CNBC.)

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Tom Mangan posted at 7:56 am December 16th, 2008 |

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