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. |
