Nervous markets slipping on oil slick

Business Times - 12 May 2008

WALL STREET INSIGHT
Nervous markets slipping on oil slick

Stocks reeling from talk that oil prices may reach US$200 a barrel within 2 years

By ANDREW MARKS
NEW YORK CORRESPONDENT

WITH all the drama that's beset the US stock market in the first four months of 2008, it is perhaps understandable that skyrocketing oil prices haven't dominated investor worries this year. It appears that's about to change.

Although AIG's announcement last week of a whopping US$7.81 billion loss in its first quarter because of writedowns on credit-default swaps and mortgage-related investments reminded investors that the credit market's problems are still with us, the liquidity crisis appears to have faded enough for investors to breathe a sigh of relief, and stocks to rally over the last two months.

But as those fears recede, the persistent rise of oil prices to newer heights are starting to make the markets nervous. 'That's where the action is going to be over the next several weeks and into the summer - oil prices, oil prices, oil prices,' said Turner Securities energy analyst Scott Miller.

Oil prices rose by a staggering US$60 per barrel over the last 12 months. 'And no one has seemed to really take notice,' Mr Miller said.

Not anymore, with crude for June delivery rising as high as $126.25 a barrel on the New York Mercantile Exchange last Friday, before closing at US$125.96, up US$2.27 on the day, and 8.3 per cent for the week. 'It's as though people are finally able to stop worrying over impending disaster in the financial markets and are now looking at the fundamentals underpinning the stock market, and they're saying, 'Uh-oh', when it comes to oil prices having gotten to be so high,' said Ron Pierce, portfolio manager at Grant Capital Management.

'And I think that's a very realistic view because at these levels, oil prices will hamper the US economy's ability to come back from recession,' he said.

Indeed, the surge in oil has sparked deep concern that American consumers, already hampered by a depressed housing market, rising unemployment and inflation, will have little left over to spend after filling up their gas tanks.

'The price of gas could effectively neutralise the positive impact of the tax rebates. Consumers are being forced to cut back even further on their spending in other areas because they're paying so much at the pump to fill their cars, and that spells big trouble for an economy that is so heavily dependent on consumer spending as ours is,' observed Joel Naroff, president of Naroff Economic Advisors. An oil analyst at Goldman Sachs shook Wall Street last week with a forecast that oil prices could reach US$200 a barrel within two years.

Last Friday, a combination of a sell-off in AIG, and oil price woes sent stocks reeling. The Dow Jones Industrial Average fell 120 points, or 0.9 per cent, on Friday, hit by resurging woes from the financial sector. The S&P 500 Index fell 9.4 points, or 0.7 per cent to 1,388. The Nasdaq Composite Index lost five points, or 0.2 per cent, to 2,445.

For the week, the Dow lost more than 300 points, or 2.4 per cent, while the S&P 500 gave up 1.8 per cent. The technology-heavy Nasdaq fared the best of the three major indexes, but still retreated 1.3 per cent over the week.

Traders heading off for the weekend last Friday sounded bearish when asked to look forward to the coming week. Pointing to a warning from Fedex, seen as a good barometer of economic activity, after the close of trading that its earnings would come up short of expectations, Brian Samuels, a trader at Pro-Gain Capital Management, said: 'Now that the first-quarter earning season is over, we've got some hard work ahead of us. I don't know how much good news there is to look forward to, and the market hasn't adjusted its expectations for earnings to account for the oil spike.'

With consumer spending accounting for more than two-thirds of US GDP, the pressures of oil prices will be on investors' minds as they eye the coming week's offering of consumer price data and retail sales reports.

Tuesday brings retail sales, with the CPI scheduled for release on Wednesday. The economy's housing woes will also be spotlighted on Friday, with housing starts and pending home sales reports due out.

The Fed could also prove to be a market mover this week, with seemingly more Fed officials giving speeches - 15 in all - than corporations offering Q1 earnings reports. The star, of course, will be Fed chief Ben Bernanke, who speaks on Thursday at the Chicago Fed's annual conference on bank structure and competition.

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