Markets slide on oil price

Mideast tensions contribute to Dow 400-point drop since Wednesday

July 15, 2006|By TRICIA BISHOP | TRICIA BISHOP,SUN REPORTER

Investor anxiety over conflicts in the Middle East and skyrocketing oil prices sent U.S. stock markets tumbling for the third-straight trading session yesterday, dropping the Dow Jones industrial average by almost 400 points since Wednesday.

That means that consumer worries about 401(k)s, mutual funds and stock portfolios are heightened along with the other financial woes that accompany expensive oil: increased prices for gasoline and other goods, a slowdown in the economy and a possible slide toward recession.

The Dow closed down about 107 points, or 0.99 percent, to 10739.35 yesterday - its third day of triple-digit losses - and is just above the break-even point for the year.

The Nasdaq composite index, which dropped nearly 17 points or 0.82 percent, was at a 14-month low. The Standard & Poor's 500 index was down by about 6 points or 0.49 percent. For the year, both of those indexes are down, 7.62 percent and 0.97 percent, respectively.

The declines - which analysts called significant but not "calamitous" - coincide with fighting between Israel and the Islamic militant group Hezbollah, attacks on Nigerian oil installations and the nuclear standoff between the West and Iran. Adding to concerns are rising oil prices caused by fears that Middle East activity will disrupt production. In New York trading yesterday, the price of oil reached a high of $77.03 a barrel, topping Thursday's price by 33 cents.

"We've never seen a price increase like this without a recession before," said James L. Williams, an energy economist with WTRG Economics in London, Ark. "Another $10 or $20 a barrel would make it almost unavoidable."

That figure is still a long way off and not a certainty, Williams said, adding that the situation could change quickly if the turmoil subsides.

Geopolitical tension and the price of oil are inextricably linked, economists said, with the first causing fears that production of the latter will be interrupted. If that happens, the price of oil could shoot up to "$100 or more," said Nigel Gault, a U.S. economist for Global Insight in Lexington, Mass.

"We're just where we are on the basis of fears that there could be [an oil] supply disruption," he said. "It's a very, very tight market. There's no spare capacity, no room to absorb shocks."

When adjusted for inflation, crude oil prices per barrel would have to reach $99.83 to equal the record high set in 1979.

Consumers said yesterday that this week's stock market woes contributed to their already slumping portfolios.

On an outing with his grandson in Baltimore County yesterday, John Padousis, a 75-year-old retiree, explained that he has been concerned about the health of his investments and mutual funds for a while. The Timonium resident said he fears that the Middle East conflict will exacerbate economic problems.

Rising oil prices affect more than the price of gas. Most goods and services have an energy cost component, so increases in oil prices mean that other costs have to rise to account for the difference, or company profits will have to drop.

Already-high summer gas prices, which average $3.06 per gallon in Maryland, are predicted to rise before the end of the month, based on the cost of oil, which has more than tripled since 2003. That's causing some consumers to spend less, said Stephen Brown, director of energy economics at the Federal Reserve Bank of Dallas.

"There's indication that stores that specialize in selling to low-income customers are seeing lower sales," Brown said, which is causing investors to pull out of those stocks. Wal-Mart's stock was down almost 7 percent for the week, dropping $3.13 since Monday to close yesterday at $43.05 on the New York Stock Exchange.

A Commerce Department report yesterday showed that retail spending was down about 0.2 percent last month, and Wall Street analysts had expected an increase.

Still, the $363.8 billion spent was a 5.9 percent increase over spending in June last year.

Gold closed up $13.75 yesterday to $663.25 per ounce. Since last year, the price of gold has risen by nearly $245, or 59 percent, as investors have fled the more volatile stock market in search of a safer harbor.

Leaders of the Group of Eight - a consortium of industrial nations including Britain, Canada, France, Germany, Italy, Japan, Russia and the United States - are meeting in Russia today to discuss international political and security issues, including the fighting between Israel and the Islamic militant group Hezbollah.

"This weekend is very important to see how the Middle East tensions develop and evolve," said Stacy Nieuwoudt, an energy research analyst with Pickering Energy Partners of Houston, Texas. "Clearly the Middle East is the driver here. ... If peace is achieved, and this event blows over, then I expect oil prices to fall."

tricia.bishop@baltsun.com

Sun reporter Tyeesha Dixon and the Associated Press contributed to this article.

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