Crude Leaps Nearly $11,
In Fresh Hit to Economy
NEIL KING JR. / Wall Street Journal 7jun2008
Crude oil notched its largest price jump ever on Friday, leaping nearly $11 to more than $138 a barrel, on news of a weakening dollar and continued jitters over the reliability of world supplies.
The surge, coming just as many analysts thought oil prices were set to fall, sent stocks plunging amid fears that the U.S. economy could be in for a combined bout of inflation and slow growth. The skyrocketing price of oil, now up more than 44% so far this year, is battering the airline and auto industries and causing consumers to cut back on driving and nonessential spending.
Oil's dramatic rise helped whip up a day of turmoil for the broader financial and commodities markets. U.S. benchmark crude settled up by a record-setting $10.75, to close at $138.54 on the New York Mercantile Exchange. That jolt is reinvigorating worries that crude prices could ratchet still higher, putting a severe squeeze on many economies around the world and deepening the growing tension between the world's big oil exporters and consuming countries.
Friday's jump — which was equivalent to the entire price of a barrel of oil in late 1998 — was fueled in large part by the dollar's sharp fall, with investors snapping up oil as a hedge against the currency's eroding value. Reflecting those inflation fears, other key commodities also resumed rising Friday. Gold, a classic inflation hedge, soared 2.7% to close at $895.40 an ounce, while other metals like copper, which had been slumping, shot up.
But crude's big jump was also driven by other irritants, including a sudden rise in political tempers in the oil-rich Middle East. A senior Israeli official told a prominent Israeli daily Friday that an Israeli attack against Iran was "unavoidable" if Tehran continued to push forward on its controversial nuclear program. Some observers said that single comment, from Transport Minister Shaul Mofaz, may have given oil prices a greater shot of adrenaline than anything else.
"It's one word that did this," said Guy Gleichmann, president of United Strategic Investors Group, a commodities brokerage in Hollywood, Fla. "'Unavoidable.' It's basically saying, 'We're going to attack.'"
Rumors of war with Iran, Mr. Gleichmann said, have often led to a spike of several dollars in the price of oil. The issue had died down for a while, he said, but "this is like Jason coming back from the dead."
Crude's sudden rebound after a week of easing prices left some OPEC officials complaining privately that the market had lost all logic, and was now operating by forces untethered to the realities of supply and demand. Still, the soaring price of crude is sure to ramp up pressure on the Organization of Petroleum Exporting States to weigh a production increase.
The group of 13 major exporters, who supply about a third of the world's demand, haven't formally raised output since last fall, and the group's next planned meeting isn't until September.
One worry weighing on the market, however, is whether OPEC and its dominant member, Saudi Arabia, are really in a position to contribute big amounts of additional oil in a pinch. The group's spare capacity is now unusually thin — around two million barrels a day in a market of 86 million barrels a day — and much of that consists of a grade of heavy, sour oil that's less attractive to the market because it yields fewer high-value products such as gasoline.
Before this year, gyrations of the magnitude of Friday's $10 jolt were almost unheard of in an oil market where a $2 or $3 shift in the price of crude used to be headline news.
The apparent irrationality of oil's recent leaps and falls is sure to add fuel to accusations that the price rise is largely the work of market speculators.
The U.S. Commodity Futures Trading Commission announced last week that it had launched an investigation into whether there was evidence of market manipulation in the wholesale trading of petroleum products. The CFTC said Thursday that it is hosting an international gathering of energy regulators in Washington next week to discuss ways "to detect and deter manipulation in the global energy markets."
Some analysts said that Friday's spike might have been driven in part as investors who had placed bets on a fall in prices rushed to buy back oil.
After hitting its previous peak of $133.17 a barrel last month, oil tumbled 8.2% in nine days — emboldening investors who believed prices would keep falling. Then, on Thursday, the market abruptly lurched upward, wiping out gains investors might have made betting against oil. There was no definitive evidence that panicked so-called short sellers contributed to the rally, but volume in exchange-traded funds used to sell oil short did rise on Friday. Volume in the biggest oil-exchange traded fund, the Energy Select SPDR, hit nearly 47 million shares, almost double its typical pace. But while such trading may have contributed to a surge in activity, it didn't appear to be the main cause of the upward spike, traders said.
At the same time, oil analysts say there are fundamental forces keeping prices high. Despite soaring retail prices, the demand for diesel — the lifeblood fuel of the world economy — continues to rise as consumers in places like China and Chile turn to generators to fill in for failing electricity grids.
The investment bank Morgan Stanley is predicting that prices will top $150 a barrel as the U.S. market — which consumes nearly a quarter of the world's daily output — confronts tightening supplies of crude. Oil stockpiles in the U.S. have fallen far below the five-year average, a report from the bank points out.
One factor leading to a crimped U.S. market: Persian Gulf suppliers are shipping increased quantities to fast-growing Asia, at a time when exports are falling sharply from two of America's largest suppliers, Mexico and Venezuela.
It takes time for price moves in the futures market to make their way to the pump, so consumers are unlikely to see significantly higher gasoline prices right away. According to the AAA, the national average price for gasoline actually slipped to $3.986 a regular gallon Friday, from a record-high of $3.989 the previous day.
But Friday's move doesn't bode well for drivers in coming weeks. Over the past few months, the refiners who turn crude into gasoline have absorbed part of the rise in oil prices. Cooling fuel demand has made it hard for them to charge more for their products. While crude-oil prices in the spot market have roughly doubled from last year, retail gasoline prices are only about 25% higher. But if refiners have to pay much higher prices for oil, they might resort to finally passing on the full increase in crude to consumers. Refiners could also cut back production, reducing gasoline and diesel supplies and putting pressure on prices.
Many traders began to predict earlier this week that oil was headed downward. They noted that the dollar began to rebound after Fed Chairman Ben Bernanke announced Wednesday that he didn't foresee future U.S. rate cuts, which would tend to weaken the greenback against other currencies. But European Central Bank President Jean-Claude Trichet put a spike through the dollar Thursday when he suggested the European bank could move to raise rates.
Traders lately have tended to flock to buy oil partly as a hedge against the falling dollar, though the two are hardly joined at the hip. U.S. benchmark crude has risen over 40% so far this year, while the dollar is down against the euro just over 6% in the same period.
Even those warning that an oil bubble is about to burst acknowledge that there are also some enduring forces propelling crude higher. In testimony before the Senate Tuesday, billionaire hedge-fund manager George Soros cautioned that commodities prices could soon crash. But he also pointed out the "accelerating depletion" of the world's aging oil fields, and the cost and difficulty of finding new pools of oil, rank among many forces causing jitters in the financial community over future oil supplies.
The ongoing rise in oil prices has increased pressure from producers and their allies to open up areas that have been off-limits to drilling, such as the Arctic National Wildlife Refuge in Alaska and the waters off California and Florida.
J. Larry Nichols, president and chief executive of independent oil and gas producer Devon Energy Corp., renewed that call on Friday. "It just drives home once again how misguided our energy policy has been for the last two decades," Mr. Nichols said.
—Ben Casselman and Ana Campoy contributed to this article.
source: p.A1 6jun2008