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Oil Rally May Be Economy's Undoing
Saturday March 8, 5:36 am ET
By Joe Bel Bruno, AP Business Writer
Record Oil Prices Becoming Hard to Ignore for Investors Preoccupied by Credit Crisis

NEW YORK (AP) -- Preoccupied the last few months with shrinking credit and a slumping economy, Wall Street has all but ignored the relentless rise in oil prices that has taken a barrel of crude to a once-unthinkable $106.

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But the market may not be able to look the other way much longer -- especially when consumers, already hurting from the soaring cost of gasoline, find themselves paying even more to fill their tanks come spring.

"Investors are just getting used to higher oil prices in what has really been a stealth rally," said Peter Dunay, chief investment strategist with Meridian Equity Partners.

He said lofty oil prices "should be getting lots of attention" by Wall Street. But, investors have instead been distracted by a nearly endless stream of bad news about the economy -- from banks taking steep write-downs for soured mortgages to the loss of tens of thousands of jobs.

To be sure, there is a lot for Wall Street to worry about these days. Major stock indexes have slid by double digits since the start of the year as economists fear the economy might already be in a recession. And, the summer's subprime mortgage collapse continues to threaten financial institutions around the world.

Although there certainly were many days last year that Wall Street tumbled in response to the punishing march in oil prices, the advance toward $100 a barrel at 2007's end and the surpassing of that milestone this year might actually have been welcomed by some investors. Institutions have been piling into crude -- along with other commodities -- to flee not just sagging stocks but also the flailing U.S. dollar.

The greenback's fall against other major currencies has helped drive buying across commodities as investors overseas view dollar-denominated assets as relatively cheap. Meanwhile, big institutional investors have used hard assets like oil as a hedge against inflation.

On Friday, oil prices jumped to a new record above $106 on the New York Mercantile Exchange. At the pump, gas prices are 68 cents higher than a year ago, and within a nickel of last May's record price of $3.227 a gallon. And they can only go higher as the summer driving season, which always sends gas climbing, arrives.

Those prices, which have sent the cost of almost everything in the economy higher, are expected to translate into a further increase in inflation. A growing number of economists are becoming concerned that the Federal Reserve, which has been cutting rates in hopes of reinvigorating the economy, will be forced to stop because of the overall effect of more expensive energy.

Should the central bank cut rates at its March 18 meeting, which is widely expected, that move could also further weaken the dollar -- and possibly keep the cycle of rising oil prices going.

Then there is the problem of an even greater impact on the consumer -- whose growing hesitation about spending has been reflected in weak retail sales, even during the holiday season. What happens as gasoline prices in particular increase? The fear is that Americans, forced to pay more money for gasoline and overwhelmed by other economic issues, will continue to hunker down.

"The U.S. consumer, who has carried the economy for the past half-dozen years, is in full defensive mode, battered by falling housing values, spiking food and energy prices, tightening lending standards, the teetering stock market and hints of weakening in the labor market," said T.J. Marta, economic and fixed income strategist for RBC Capital Markets.

He said the consumer is clearly pulling back, and the retrenchment could dramatically pick up speed as energy prices rise. Losing the consumer -- whose spending accounts for more than two-thirds of the U.S. economy -- would have disastrous effects, analysts said.

Wal-Mart Stores Inc. reported better-than-expected same-store sales for February this past week. However, investors' cheer was short-lived as the gains appeared to come from bargain-seeking consumers who appeared to pare their purchases elsewhere.

Dunay said monitoring earnings and sales reports at the world's largest retailer is a good way to gauge the mood of consumers. And it's not just big-ticket purchases like televisions and computers used to determine if consumers are nervous.

"Many Wal-Marts have started to stock more food on their shelves," he said. "And, that's a really telling sign."

AP Business Writer John Wilen contributed to this report.

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Exactly, except for last week when crude inventory dropped some, it had been rising for 6 or 7 weeks,as well as gasoline.

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Oil prices above $107 a barrel in Asia
By GILLIAN WONG, Associated Press Writer
Tue Mar 11, 2:13 AM ET
SINGAPORE - Oil prices were steady above $107 a barrel after rising to a record in the previous session as the U.S. dollar weakened further.

Speculation that rising prices for oil and other commodities will offset the falling dollar has driven oil's rally from $87 a barrel in January.
The dollar has fallen to three-year lows against the yen and the head of the European Central Bank expressed concern Monday about the "disorderly movements" of exchange rates.

"This surge to new records is driven by the speculative and large funds moving money into commodities. It's primarily a U.S. dollar and inflation play by financial investors," said Victor Shum, an energy analyst with Purvin & Gertz in Singapore.

Light, sweet crude for April delivery dropped 21 cents to $107.69 a barrel in Asian electronic trading on the New York Mercantile Exchange, by midday in Singapore.

Crude futures on Monday rose $2.75 to settle at a record $107.90 a barrel after setting an all-time trading high of $108.21 earlier in the session.

Many analysts believe speculative investing attracted by the weak dollar is the primary reason oil has risen so far so fast in recent months. Crude futures offer a hedge against a falling dollar, and oil futures bought and sold in dollars are more attractive to foreign investors when the dollar is falling.

There was little in oil's price uncertainty to convince analysts that the huge runup in oil prices has run its course. Analysts have said expectations are growing that the U.S. Federal Reserve would cut interest rates at its policy planners' next meeting March 18.

"Lower interest rates would mean increasing liquidity, which means a further weakening of the U.S. dollar and rising U.S. inflation," Shum said. "What that means for investors is that they therefore move their money into commodities as a hedge against inflation."

While the dollar fluctuated against the euro on Monday, many investors believe the greenback is likely to keep falling as the Fed continues to cut rates. Many analysts believe the rise in crude prices is not supported by the market's underlying fundamentals, noting that supplies are generally rising while demand is falling.

"Crude oil futures' relentless advance is a price bubble and certainly, a sharp pullback cannot be ruled out," Shum said.

"What may at some point trigger investors to exit oil is perhaps a build up of poor economic data out of the U.S.," he added. "That may be enough of a trigger to refocus attentions on the U.S. and slow oil demand growth there."

Other energy futures were mixed Tuesday. April heating oil futures rose 0.16 cent to $2.975 a gallon while April gasoline futures lost 0.5 cent to settle at $2.7099 a gallon.

April natural gas futures fell 2.3 cents to $10.001 per 1,000 cubic feet after settling at $10.024 on Monday, the first time a natural gas contract has closed above $10 since January 2006.

Natural gas was following oil higher, but also rising in anticipation of cooler temperatures across the U.S. Midwest and Northeast, analysts said.

In London, Brent crude futures were flat at $104.16 a barrel on the ICE Futures exchange.

The U.S. Energy Information Administration releases its short-term energy outlook later Tuesday and weekly oil and product inventory data on Wednesday. These indicators, along with the Commerce Department's retail sales data release on Thursday, are traditionally used as cues for oil prices, though their impact has been muted lately.

A Dow Jones Newswires survey of analysts found an average forecast of a 1.7 million barrel increase in oil inventories for the week ending March 7, a 100,000 barrel increase in gasoline stocks and a 2 million barrel draw in distillate inventories. Last week saw a surprise draw in oil inventories, after seven-straight weeks of gains.

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