Business News

Oil up, stocks down

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by Peter Switzer

Not surprisingly, stocks headed south on Wall Street with futures for oil pushing through critical price levels. Brent crude futures went past the US$110-mark and the NY crude counterpart broke the US$100-level.

These have been big percentage moves with Libyan production down by around 25 per cent because of the street protests and Muammar Gaddafi’s response to the issue.

At this stage as Thomson Reuters reports, the “Libyan leader vowed in a defiant speech on Tuesday that he would not step down, promising severe punishment to his detractors".

A long fight will mean a long oil disruption and that has global market and economic implications.

Will oil go to US$150 per barrel?

Reports say OPEC can make up for a Libyan shortfall but in the short-term the price has spiked but experts say the event doesn’t have to take us to the US$150-level, which we came close to in 2008. That would pose an enormous threat to the fledgling global and US economic recovery and would play havoc with share prices.

Edward Meir, an analyst at MF Global in New York, summed up his concerns with Thomson Reuters.

"I don't think Libya alone will take us to US$150 a barrel, but, if unrest spreads in the Gulf countries, we could easily get there,” he speculated. “That is why it is imperative the Saudis release some extra barrels into the market now to calm the situation, rather than simply trying to talk the price down."

More fear

Not surprisingly the CBOE Volatility Index or fear index in the USA has moved to 21 after being around 15 in recent weeks. In fact, this is the kind of reaction that the index had to the European debt fears in May last year.

On that score, this Libyan issue on top of the Bahrain problems means European officials need to handle their debt challenges very professionally. One false move on this front, with these oil disruptions already spooking markets, and we could see a big sell off on stock markets.

US overnight

The Dow overnight close 107.01 points or 0.88 per cent lower to 12,105.78 and the S&P 500 fell 8.04 points or 0.61 per cent to 1307.4.

On a positive note and the Mortgage Banker's Association said home loan applications rose strongly by 13.2 per cent last week on lower interest rates. And better still, sales of previously owned homes rose in January and this was not anticipated.

The market battle remains the US recovery versus the mess in North Africa and the Middle East and unfortunately the latter is winning by a country mile.

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Published on: Thursday, February 24, 2011