Oil price drop nice, but eco­nomic signs are bleak

The Washington Times Weekly - - National - BY PA­TRICE HILL

Oil prices plunged 10 per­cent to be­low $100 a bar­rel in New York on May 5 — the big­gest drop since the 2008 fi­nan­cial crash — af­ter a gov­ern­ment re­port shook mar­ket con­fi­dence by show­ing a big jump in lay­offs two weeks ago.

The col­lapse in oil prices couldn’t come at a bet­ter time for the econ­omy and con­sumers — just as av­er­age gaso­line prices were threat­en­ing to set records of more than $4 a gal­lon. The sud­den drop is ex­pected to ease pres­sure on pump prices in com­ing days.

Trig­ger­ing the mar­ket crash — which af­fected stocks and com­modi­ties, from crude oil to sil­ver and gold — was more ev­i­dence of di­min­ished growth in the United States this year, caused in no small part by sky­rock­et­ing prices for fuel and food.

Lay­offs have been on the rise, prompt­ing a jump in new claims for un­em­ploy­ment ben­e­fits two weeks ago to an eight-month high of 474,000, the La­bor Depart­ment re­ported May 5.

Al­though tem­po­rary lay­offs at Ja­panese-owned auto fac­to­ries with parts short­ages and other tran­si­tory de­vel­op­ments likely in­flu­enced the num­ber, job­less claims had al­ready been on the rise to more than 400,000 in re­cent weeks af­ter av­er­ag­ing fewer than 400,000 in the first three months of the year.

Andrew Gled­hill, an econ­o­mist at Moody’s An­a­lyt­ics, called the un­em­ploy­ment news “dis­qui­et­ing,” al­though he and other econ­o­mists ex­pect job­less claims to fall back to less wor­ri­some lev­els of fewer than 400,000 in com­ing weeks.

De­spite the steady job gains, “dam­age to the la­bor mar­ket over the last sev­eral years has been great,” Mr. Gled­hill said. “There are 8 mil­lion unem­ployed work­ers; roughly half have been unem­ployed for greater than 26 weeks. [. . . ] The la­bor mar­ket will take sev­eral years to re­coup the losses suf­fered dur­ing the re­ces­sion.”

The sober­ing job news had an ex­plo­sive ef­fect in com­modi­ties mar­kets, where in­vestors and spec­u­la­tors had bid up prices this year bet­ting that more ro­bust growth in the U.S. econ­omy would help to send raw ma­te­ri­als prices to record highs.

Pre­mium crude oil prices, which had soared to more than $110 a bar­rel, nose-dived May 5 by more than $10 to be­low $98.50 in New York trad­ing. Other key com­modi­ties in­clud­ing corn, wheat and cop­per, which have been driv­ing up con­sumer in­fla­tion, joined in the mar­ket down­draft.

The Reuters-Jef­feries com­mod­ity in­dex, a global bench­mark, dropped by nearly 5 per­cent. Sil­ver prices fell an­other 10 per­cent, adding to a 28 per­cent drop for the week, the big­gest for the pre­cious metal since 1980. Sil­ver also fell in re­sponse to stren­u­ous anti-spec- ula­tion mea­sures im­posed by U.S. reg­u­la­tors.

The rout in com­modi­ties fed stock mar­ket de­clines from Tokyo to Frank­furt. The Dow Jones in­dus­trial av­er­age fell as much as 202 points on the morn­ing’s un­em­ploy­ment news, but

Trig­ger­ing the mar­ket crash — which af­fected stocks and com­modi­ties, from crude oil to sil­ver and gold — was more ev­i­dence of di­min­ished growth in the United States this year, caused in no small part by sky­rock­et­ing prices for fuel and food. Lay­offs have been on the rise, prompt­ing a jump in new claims for un­em­ploy­ment ben­e­fits two weeks ago to an eight­month high of 474,000, the La­bor Depart­ment re­ported May 5.

later pared its losses to end down 139 points at 12,584 as in­vestors sur­mised that the big drop in oil prices was good news for con­sumers and the econ­omy.

Amid plung­ing mar­kets, the U.S. dol­lar gained fa­vor, surg­ing by nearly 2 per­cent against the euro and ris­ing by more than 1 per­cent against cur­ren­cies over­all.

Karl Schamotta, se­nior mar­ket strate­gist at West­ern Union, said the re­cent run-up in oil and other global com­modi­ties looked “frag­ile” and likely to re­verse it­self as in­vestors had ig­nored warn­ings that high prices were curb­ing con­sumer de­mand the world over.

“The risk of a mar­ket cor­rec­tion was grow­ing,” he said, not­ing that the Or­ga­ni­za­tion of Pe­tro­leum Ex­port­ing Coun­tries and In­ter­na­tional En­ergy Agency have down­graded their fore­casts for global oil de­mand as con­sumers cut back to avoid high prices.

“The surest rem­edy for high prices may be the high prices them­selves,” Mr. Schamotta said. But in­vestors got drunk on the “cheap liq­uid­ity” pro­vided by the Fed­eral Re­serve and other cen­tral banks, he said, tak­ing out big loans and set­ting up highly lever­aged po­si­tions to profit from higher prices.

Gold­man Sachs, the Wall Street firm that of­ten leads the charge in fa­vor of com­mod­ity in­vest­ments, also warned re­cently that “ex­cep­tion­ally high” oil prices had “pushed ahead” of global de­mand and were due for a cor­rec­tion.

De­spite the set­backs, an­a­lysts ex­pect in­vestors to keep flock­ing to oil and other com­modi­ties, which they see as good hedges against in­fla­tion and a de­clin­ing dol­lar. Com­mod­ity prices have an in­verse re­la­tion to the dol­lar, gen­er­ally ris­ing when the dol­lar de­clines and fall­ing when the dol­lar rises.

The drop in oil prices couldn’t come too soon for U.S. con­sumers, who were ex­pected to have to pay $1,200 more for gas this year than in 2009.

The av­er­age price for reg­u­lar gas na­tion­wide had surged to $3.98, verg­ing on $4, and pre­mium gas prices are well over $5 in Cal­i­for­nia and other high­priced ar­eas.

The big drop in oil prices may be big enough to pre­vent pump prices from reach­ing records ex­ceed­ing $4, some an­a­lysts said.

“I wouldn’t be sur­prised if we dropped to about $3.50 by the mid­dle of June,” said Fred Rozell, re­tail pric­ing di­rec­tor at Oil Price In­for­ma­tion Ser­vice.

ASSOCIATED PRESS

Num­bers can hurt: Gaso­line pump prices are shown May 2 at a gas sta­tion in Port­land, Ore.

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