Stocks Retreat as Oil Surges
Near-record oil prices following an Alaskan oilfield shutdown prompted stock investors to sell on inflation fears Monday, one day before the Federal Reserve’s next decision on interest rates.
BP said late Sunday that it would shut down the Prudhoe Bay oilfield, which represents 8% of daily U.S. crude production, due to possible pipeline corrosion. Crude oil futures surged $2.22 in response to settle at $76.98 a barrel on the New York Mercantile Exchange -- near the closing record of $77.03 and all-time intraday high of $77.40, both set July 14.
The stock market showed some resilience despite the higher oil prices, as many investors held out hope that the Fed would not raise rates today. Nonetheless, there are concerns that even if the Fed halts its rate increases, inflation may yet become a concern.
“Whether or not the Fed pauses in August is not as important as their plan going forward,” said Russ Koesterich, senior portfolio manager at Barclays Global Investments in San Francisco. “I don’t think the market’s going to get the kind of finality it’s looking for. The concern is, yes, they pause in August, but raise the specter of raising rates in September.”
The Dow Jones industrial average fell 20.97 points, or 0.2%, to 11,219.38.
Broader stock indicators also dropped. The Standard & Poor’s 500 index lost 3.59 points, or 0.3%, to 1,275.77, and the Nasdaq composite index shed 12.55 points, or 0.6%, to 2,072.50.
Bonds lost ground as well in advance of the Fed meeting, with the yield on the benchmark 10-year Treasury note rising to 4.92% from 4.89% on Friday.
The nation’s benchmark short-term interest rate now stands at 5.25%, and the Fed has raised rates by a quarter of a percentage point in each of its last 17 meetings dating to June 2004. Ever since the Fed signaled six weeks ago that the economy was growing at a slower rate and that it was taking this moderation into account in its deliberations, Wall Street has been parsing economic data and looking for signs of further slowing in hopes that the Fed would stop raising rates.
Over the last two weeks, slowing job growth and a weaker-than-expected second-quarter gross domestic product had many investors optimistic that the long-expected pause would come today. The market’s modest move lower on very light trading volume showed investors’ willingness to wait and see what the Fed would do.
The market’s optimism was evident Monday, when stocks, despite their declines, largely stood their ground.
“If you plot the S&P; 500 against oil prices for the last two to three years, they’re both rising,” said Brian Gendreau, strategist at ING Investment Management. “Now, certainly, if oil prices stay this high, consumer spending and earnings are going to be hurt. But for now, I think we’re hanging in there today because we’re actually enjoying some rationality.”
In other market highlights:
* Shares of BP lost $2.09 to $70.45 on the Prudhoe Bay shutdown, which would take away 2.5% of the company’s total daily production. BP Prudhoe Bay Royalty Trust, which manages the oilfield’s business on behalf of BP and others, tumbled $11.04, or 13%, to $76.85.
Rival oil producers saw modest gains, however, as investors believed they would benefit from the surge in oil prices. Hess rose 72 cents to $52.72, while Chevron climbed $1.17 to $66.83.
* A gauge of transportation shares dropped 1.7%, extending its third-quarter decline to 15%, the worst performance among 24 industry groups in the S&P; 500, on concern that fuel costs will reduce earnings. Union Pacific retreated $2.86, to $80.99, while Southwest Airlines slipped 28 cents to $17.69.
* Interest rate concerns and rising oil prices also weighed on overseas markets, with Japan’s Nikkei stock average tumbling 2.23%. In Europe, Britain’s FTSE 100 closed down 1.03%, while Germany’s DAX index and France’s CAC-40 both lost 1.68%.
* In earnings, power producer AES said its quarterly profit nearly doubled due to higher electric prices and better revenue across all its businesses. AES gained $1.82 to $20.07. But oil and gas explorer and transmitter El Paso fell 81 cents to $14.76 despite posting a profit after a year-earlier loss. The company beat Wall Street’s earnings forecasts by a penny per share.
* Comic book publisher Marvel Entertainment said its licensing deals slumped in the second quarter, though its profit still beat analyst expectations. Marvel rose $1.26 to $19.36.
* Mylan Laboratories tumbled $3.09 to $19.92. Regulators agreed to let another drug maker sell a rival generic copy of a pain patch. The patch generated about $70 million in sales for Mylan in the fiscal first quarter, and the company said it had not expected additional generic approvals of the medicine during fiscal 2007.
* Kindred, an operator of nursing homes and pharmacies, jumped $1.94 to $30.94. Kindred and AmerisourceBergen will combine their pharmacy management units to create the industry’s second-largest publicly traded company with annual revenue of about $1.9 billion. AmerisourceBergen added 46 cents to $43.18.
