Mideast Violence Lifts Oil to New High
Worsening geopolitical strife drove the price of oil to a new high Thursday and sent stocks plummeting worldwide, threatening a replay of financial markets’ spring turmoil.
Crude oil futures in New York soared $1.75 to $76.70 a barrel, topping the previous record of $75.19 reached last week, on fears that escalating violence between Israel and Hezbollah militants in Lebanon could deepen tensions with Iran and spill into other energy-rich Mideast countries.
Oil continued to rise in after-hours activity on the New York Mercantile Exchange late Thursday, reaching $78.40.
On Wall Street, the Dow Jones industrial average tumbled 166.89 points, or 1.5%, to 10,846.29, its third triple-digit loss in five sessions.
Although the Dow and most other U.S. indexes held above their June lows, the technology-dominated Nasdaq composite fell to its lowest level since October. Stocks also were broadly lower in Asia and Europe.
Financial markets this year have appeared to mostly shrug at the violence in Iraq and saber-rattling by North Korea and lran over their nuclear programs. Many investors’ main worry has been the upward trend in inflation and interest rates.
But the Israel-Hezbollah conflict seemed to add one more geopolitical concern than investors could handle, analysts said.
“Fear is starting to take over,” said Dan McMahon, chief trader at brokerage CIBC World Markets. Investors, he said, are thinking that “there are a whole lot of reasons to be selling stocks, and not a lot to be buying.”
What’s more, as oil climbs relentlessly, it complicates the outlook for interest rates and for global economic growth.
Many investors expect the Federal Reserve to soon halt its two-year-long credit-tightening campaign, perhaps at the policymakers’ Aug. 8 meeting. But a further surge in oil prices could fan inflation fires and put pressure on the Fed and other central banks to keep raising rates.
Energy expert Daniel Yergin said that the oil market’s jitters “are outweighing the fact that the market fundamentals are actually improving.” Global crude inventories are in good shape, said Yergin, chairman of consulting firm Cambridge Energy Research Associates.
Nonetheless, he said, “another event could well send oil over $80, even though the fundamentals don’t justify it.”
Crude futures contracts for March, April and May 2007 all closed above $80 a barrel Thursday, illustrating traders’ nervousness about oil supplies as far out as next spring.
The stock market had managed to rally in the first four months of the year even as oil rose above $70 for the first time. Wall Street and equity markets worldwide began to sink in mid-May only after Fed officials made clear they were concerned about inflation and would continue to tighten credit.
The blue-chip Dow slumped from a six-year high of 11,642.65 on May 10 to 10,706.14 on June 13, a drop of 8%. Broader stock indexes, and many foreign markets, suffered deeper declines.
But stocks had rebounded in recent weeks as investors once again bet that the Fed was nearly done lifting rates.
A key concern now, some analysts said, was that the Dow and other indexes could fall below their June lows. That could stoke worries that the spring sell-off was the start of a bear market rather than a brief pullback.
One definition of a bear market is a drop of 20% or more in major indexes. The Dow is off just 6.8% from its May high. But the damage has been more severe in other market corners.
The Nasdaq composite index slid 36.13 points, or 1.7%, to 2,054.11 on Thursday, its lowest since Oct. 13. The index is down 13.4% from its five-year high reached April 19.
Bullish analysts are betting that second-quarter corporate earnings reports will buoy the market and alleviate fear that tighter credit and high oil prices threaten to bring on a recession.
Pepsico gave credence to that camp Thursday, saying profit jumped 14% in the quarter. Its shares rose 97 cents to a record $62.07.
But there also have been some high-profile earnings warnings over the last week, such as from conglomerate 3M. On Thursday, software firm SAP slid $3.51 to $46.83 after its results missed expectations. And after regular trading ended, home builder D.R. Horton warned of a shortfall in profit.
Andy Brooks, chief trader at money manager T. Rowe Price Group in Baltimore, said that if investors could take a longer-term view, “you could make a case that it’s a pretty nice entry point” at current share prices.
“Sentiment doesn’t get much more negative than this,” he said, noting that it’s often when investors are most fearful that they should be buying stocks.
But he conceded that, in the near term, geopolitical issues could keep many investors on the defensive.
Among Thursday’s market highlights:
* Losers swamped winners by more than 3 to 1 on the New York Stock Exchange and by 4 to 1 on Nasdaq, and trading volume rose from recent subdued levels. But the volume didn’t have the heft to suggest panicked selling, analysts said.
* The S&P; 500 lost 16.31 points, or 1.3%, to 1,242.29. That left it 1.5% above its mid-June closing low.
* Smaller stocks fell more steeply than blue chips, as they did in the spring decline. The Russell 2,000 index dived 13.88 points, or 2%, to 687.29.
* Walt Disney helped to pull the Dow lower, falling $1.21, or 4%, to $28.70, on reports that the company planned to scale back the number of movies it makes.
* Wal-Mart Stores also hurt the Dow. The retailer’s shares lost 99 cents to $44.16, a nine-month low, after Merrill Lynch cut its rating on the stock to “neutral” from “buy,” citing expectations of slower sales as gasoline costs pinch consumers.
Also in the retail sector, J.C. Penney slid $3.32 to $64.78, and Kohl’s dropped $1.52 to $55.72.
* In the struggling tech sector, Dell dropped 68 cents to $21.70, a fresh three-year low, on worries about a new price war in the personal computer market.
* Industrial shares were among the hardest hit on concern that rising energy costs could slow the economy significantly. Tractor maker Deere plunged $3.59 to $76.36; steel firm Nucor fell $4.43 to $49.78.
* Treasury bonds benefited as some investors sought safety amid the stock market’s turbulence. The 10-year T-note yield slipped to a four-week low of 5.07% from 5.10% on Wednesday.
Gold also benefited. Near-term futures rose $3.50 to $652.90 an ounce, a six-week high.
