Oil Spike, Jobs Report Pummel Stock Market
An unprecedented spike in crude oil prices followed the release of a
dour unemployment report Friday, sending the stock market to its worst
losses in months.
By the end of the day, hopes that the economy’s slowdown was nearly
over had been left behind. And consumers who had seen a small break in
gasoline prices again were facing the prospect of $4-a-gallon prices at
the pump.
The jobs report for May from the Labor Department was filled with grim
numbers, starting with a 5.5 percent unemployment rate, up from 5
percent. That was the biggest one-month rise since 1986 and put the
unemployment rate at its highest since October 2004.
Employers also had eliminated 49,000 jobs in May, the fifth straight month of losses.
With multiple worries to choose from, Wall Street flinched principally
because of oil’s surge. There was less concern about the jump in
unemployment, though both reinforced worries about economic weakness.
“It appears to be oil-induced rather than that jobs number,” Ken
Powell, chief equity strategist at Overland Park-based Mariner Wealth
Advisors LLC, said of Friday’s drop.
The Dow Jones industrial average gave up 3.1 percent of its value,
erasing more than the 214 points it had gained Thursday. Its loss of
394.64 points was the biggest in more than a year and left the
blue-chip stock index at 12,209.81, the lowest since the end of March.
The oil price spike, sparked by comments that Iran might be attacked by
Israel, pushed crude oil futures to a record close Friday of $138.54 a
barrel, up $10.75.
The price was up more than $11 at one point during trading on the New
York Mercantile Exchange. A barrel of oil cost less than $11 less than
a decade ago, in late 1998.
Gasoline prices had retreated a few cents in recent days, with AAA
noting that the national average retail price for gasoline dropped
Thursday for the first time in a month.
But Friday’s big jump in oil prices, which followed a smaller rise the
previous day, will put a stop to that. Wholesale gasoline prices, which
had declined earlier in the week, jumped nationwide. In the Midwest,
wholesale prices were up about 20 cents a gallon Friday.
“This is all we needed to put fuel on the fire,” said Mike Right, a spokesman for AAA in Missouri.
Oil prices were relentless Friday. They started early up about $5 for a
barrel of West Texas Intermediate oil, the U.S. benchmark, and gathered
strength through the day.
The move was triggered by stern talk from Israel officials that Iran’s
nuclear program, which Israel and the West believe exists to build
nuclear weapons, could not be allowed to continue.
Israel’s prime minister, Ehud Olmert, was quoted Friday saying that
Israel would attack Iran if it did not abandon its nuclear program. He
was in Washington this week and said his discussions with President
Bush were dominated by Iran.
There is precedent for Israeli military action. In 1981, Israeli planes
destroyed an unfinished Iraqi nuclear reactor. Iran has denied that its
nuclear program is meant to produce weapons. Last year Israel bombed a
suspected nuclear reactor in Syria.
A conflict that involved Iran would quickly be felt by the oil market.
Iran is the second-largest producer in the Organization of the
Petroleum Exporting Countries and the fourth-largest exporter of oil in
the world, according to the Energy Information Administration.
Iran produces 3.8 million barrels per day of crude oil, and there is
only enough surplus oil production in the world to replace just over
half that amount. A disruption of Iran’s oil exports clearly would be
serious, said market observers.
But there were also suspicions that those concerns were overplayed by
speculation that fed on itself as prices rose during the day. That
fervor increased when a Morgan Stanley analyst predicted that oil could
reach $150 a barrel by the Fourth of July.
“There is clearly a herd mentality with a lot of this stuff,” said James William, an analyst with WTRG Economics.
Critics said that noncommercial traders who trade financial instruments
based on crude oil need to be reined in. Judy Dugan, of
ConsumerWatchdog.org in Santa Monica, Calif., said it was time for the
federal government to get the speculation under control.
The Commodity Futures Trading Commission is investigating allegations
that speculators have caused much of the increase in oil prices. Bart
Chilton, the commission’s chairman, in a letter released Friday, said
he hoped that “some positive action can be taken in the not too distant
future.”
Chilton, however, is being criticized by several U.S. senators for
failing to respond to calls to investigate potential abuses that may
also be occurring on foreign exchanges that are dealing in U.S.
delivered oil. That criticism was stepped up Friday.
“On a day when the price of oil rises by more than $10 to a new record
high, there can’t be a more important time to ensure that the playing
field is level,” said Sen. Olympia Snowe, a Maine Republican.
The turmoil in the oil and fuel markets is a stark contrast with
earlier this week, when some market observers hoped that prices would
continue to ease up.
The federal government released data that consumer demand was down 1.4
percent in the last month and gasoline production had risen, which
helped cause a decline in wholesale gas prices.
Area motorists also had dodged a potential price spike after a fire at
a major fuel terminal in Kansas City, Kan., this week. However, the
terminal was able to quickly restart wholesale fuel deliveries, and by
Thursday also had its pipeline running at full capacity to the Kansas
City market and markets farther north.
Now there are other, larger worries affecting consumers worldwide. A
calmer view of the potential for a Mideast conflict could cause oil
prices to ease next week. But at least one analyst in Kansas City, on
the heels of the record one-day spike in oil prices, was leery of
making predictions about markets that reminded him of a madcap comedy
troupe.
“We think Monty Python is running amok,” said Lewis Adam, president of
Admo Energy, which helps businesses including fuel retailers manage
energy costs.