Saturday March 20 7:29 AM ET
Wall Street's Ride May Run Into Oil Slick
By Pierre Belec
NEW YORK (Reuters) - Wall Street is giddy after the Dow Jones
industrial average zoomed to the magic 10,000 level for the first time but an
oil price explosion could make investors think twice about pushing stocks
any higher.
The market is keeping an eagle eye on oil. Prices have shot up some 40 percent to five-month
highs after 13 global producers agreed to cut output by two million barrels per day. Their goal
is to siphon unwanted oil from the world market.
The producers have so far succeeded in lifting prices from the cheapest levels since 1973. Oil
hovers at $15 a barrel, up from a depressed $11 last December.
For the past five years, the stock market has had a near vertical climb, buoyed by low interest
rates and even lower inflation, thanks in part to oil prices, which are cheaper than bottled water.
''A jump in oil prices would certainly bring back worries about inflation,'' said Hugh Johnson,
chief investment officer at First Albany Corp. ''It's clearly a big concern for the stock market.''
Oil prices have worked miracles for the United States, allowing inflation to stay dormant and
igniting the greatest bull market ever.
Indeed, the U.S. economy and Wall Street have been rocking while the rest of the world
economies have been roiling in a state of turbulence.
But a sharp rise in energy prices would put the American economy at tremendous risk because it
could fuel inflationary pressures, or at least give the perception of rising prices.
The results would be a steady erosion of stock prices once investors grow fearful that nearly
everything will cost more.
''For the first time in quite some time, a risk to the ongoing inflationless prosperity of the United
States has arisen in the form of rising crude oil prices,'' says Allen Sinai at Primark Decision
Economics.
''If sustained, price inflation would be affected, much as price deflation was induced by the
declines in crude oil prices and energy costs over the past two years,'' he said.
Joe and Jane Consumers are already feeling the impact of the oil pact that was hammered out
just weeks ago by the Organization of Petroleum Exporting Countries and non-OPEC producers
to skim off oil from the marketplace.
The price of gasoline has soared more than 5 cents a gallon since the beginning of March. The
Department of Energy says car owners should keep their safety belts on, bracing for more
shocks at the gas pumps.
Energy is a big ticket item for the United States, which consumes one-quarter of the world's oil.
A leap in oil prices would be particularly bad news for those gas-guzzling, yuppie assault
vehicles, or SUVs, which have been selling at a faster pace than cars.
For the countries dependent on oil sales, it's been a case of the rich getting richer and the poor
getting poorer.
The world is awash in oil and desperate producers have resorted to selling more oil to make up
for falling prices. The slide in oil has been a nightmare for Mexico, which has rejigged its
budget three times to reflect the freefall in oil revenues.
Meanwhile, OPEC powerhouse Saudi Arabia, which relies on oil for three-quarters of its
revenues, has lost billions of dollars. For every dollar drop in the price of a barrel of oil, the
Saudis lose $2.5 billion a year.
''Oil is a scary commodity because it is the most widely used commodity by a long shot,''
Johnson said. ''It goes into almost all products that are made and, therefore, oil sets the cost
structure of nearly every company.''
He said an upward push on the companies' production cost could do a lot of damage to their
earnings.
''Right now, most companies are making money and recovering their costs, but a jump in oil
would come at a time when they are starting to emerge from an earnings problem,'' Johnson said.
''It would be very bad news for earnings as well bad news for stock prices.''
But the companies that are caught in a cost squeeze would struggle to raise prices and pass on
their higher operating expenses in today's very competitive global economy.
Oil market shocks have never been good for stocks. The 1973 Arab oil embargo and 1979/80
Iranian revolution both stunned the market.
Johnson said that upward pressure on wholesale prices could also touch off an interest-rate
response from the inflation-fighting Federal Reserve, which would rattle the stock market.
''There is a reasonably strong chance that it could invite the Federal Reserve to take back one of
the reductions in interest rates that it made last year,'' he said.
And as the Wall Street saying goes: Bull markets don't die of old age. They are slaughtered by
Fed rate hikes.
For the week, the Dow Jones industrial average was up 27.20 at 9,903.55 after spiking briefly
through the 10,000 milestone. The Nasdaq Composite index gained 36.96 at 2,421.49. The
Standard & Poor's 500 index was up 4.70 at 1,299.29.
dailynews.yahoo.com
Saturday March 20 10:43 AM ET
Gulf Arabs Back Hague Oil Output Cut
By Edmund Blair
ABU DHABI (Reuters) - Gulf Arab oil ministers said Saturday they fully backed a deal reached
last week in the Netherlands to cut about two million barrels of oil per day from the market in a
bid to shore up prices.
Representatives of five Arab states in the six-member Gulf Cooperation Council (GCC), who
met for one-day of talks in the United Arab Emirates capital of Abu Dhabi, said in a final
statement they ''unanimously endorse steps taken at the Hague meeting.''
Under the Hague pact, OPEC members will cut their output by 1.7 million barrels per day (bpd),
while non-OPEC producers will shave off 287,000 bpd.
''...The ministers stressed the urgent needs for continued cooperation among producing nations,
from within and outside OPEC, to reverse the direction of falling oil prices in order to achieve
a more reasonable price for a barrel of oil,'' the statement said.
The Gulf Arab states, including OPEC states Saudi Arabia, Kuwait, Qatar and the UAE, were
meeting ahead of OPEC talks in Vienna on March 23, when the Hague pact is expected to be
approved.
Tiny oil producer and non-OPEC member Bahrain also attended the Abu Dhabi talks. Another
GCC state, Oman, which does not belong to OPEC but which is participating in the Hague round
of cuts, was not present.
The statement said GCC states represented at the Vienna talks ''will work together to support
the (Hague) agreement during the upcoming OPEC conference.''
Two rounds of oil cuts last year failed to lift prices, which have plumbed to a 2-year lows in
real terms.
Saudi Oil Minister Ali al-Naimi told reporters that the Hague deal would probably succeed
better than earlier deals because it was ''suggested and backed and directed by the highest
authority in every government that has participated in the decision process.''
Naimi, whose country is the world's largest oil producer and exporter, would not forecast
where prices would go, although he repeated a desired target of $18-20 a barrel for benchmark
West Texas Intermediate (WTI). WTI was hovering around $15.25 Friday.
Naimi confirmed Saudi Arabia would cut its production by 585,000 bpd, adding that the
reduction has ''already been communicated to the customers.''
The UAE Oil Minister Obaid bin Saif al-Nasseri said his country's cuts would be ''close'' to
157,000 bpd, but did not give an exact figure.
The cuts are due to take effect from the April 1.
Qatari Oil Minister Abdullah bin Hamad al-Attiyah said compliance with the agreed cuts was
the key to boosting prices.
''We should learn the lesson and be realistic, compliance is more important than the agreement
to cut output,'' he told the UAE's official agency WAM before the Abu Dhabi talks.
The oil-dependent Gulf economies have been hit hard by weak oil prices.
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Charles |
