The Russian Oil Mob and US Housing

As the Olympics come to an end and the final medal counts are tabulated, someone not paying attention may be surprised to see that Russia is third on the list of total medals won. The world has shone a light on China and their flamboyance has lived up to and even surpassed expectations. Some estimates reach $50 billion in total spending by the Chinese in preparation for the Olympics and their desire to showcase this rapidly waking giant has been nothing short of magnificent.

But quietly sitting at third place in total medals is Russia, and the Georgian conflict aside, I think many of us have forgotten that Russia is the second largest oil exporter in the world. Many traders blamed the Georgian conflict for the huge upswing in oil prices this week, which dropped just as quickly by the end of the week when Russian forces began to pull back. While some economists started calling a bottom on oil, Goldman Sachs and others reiterated their $150 price target for oil by the end of the year. If that’s the case, consumers should expect only a temporary reduction in gas prices, if any.

The moral of this story, however, is that perhaps there is too much focus on OPEC and geopolitical tensions in the Middle East with little regard for the impact that Russia has on world oil markets. On a CNBC interview, one trader, when asked about Thursday’s huge price increase (several days after the Georgia conflict began)went so far as to say, “I don’t think many traders realized that Russia is the second largest exporter behind Saudi Arabia.” And these are people that trade oil on a daily basis??

Back at home, the data from the housing sector continues to disappoint although by now at least the results are no longer surprising. The National Association of Homebuilders pending home sales index remained at an all-time low of 16. (At least it didn’t fall further) and housing starts dropped another 11% to a level not seen since March 1991.

The talk now is that interest rates may fall further before rising again and that it will take until 2Q 2009 to begin to see an economic recovery.

This week, watch for additional economic data that may shed some light on the state of the economy and whether it’s nearing a bottom. The GDP number should be revised upward, but it will be interesting to see how personal income has been affected in light of the increase in the unemployment rate.