Mideast worries paralyze Wall St.

Oil prices are up. The stock market is down. The experts are baffled. And investors are trying to hang on for dear life.

Published July 14, 2006

As violence intensified in the Middle East on Friday, oil prices set records and fearful investors sold stocks for the third straight day.

“I’m under my desk,” said an only half-joking Jeffrey Saut, investment strategist for Raymond James & Associates in St. Petersburg. He said fears may be overblown, but “I’m not going to run the risk of buying right here in front of potentially what could be a big escalation over the weekend.”

The fear gripping the financial markets this week is that the conflict between Israel and Hezbollah militants in

Lebanon will spill over to the rest of the Middle East, disrupting world oil supplies. So far there is no oil shortage, but few investors are willing to bet that supplies won’t tighten.

The price of a barrel of oil for August delivery hit $78.40 Friday before settling at $77.03, a record close.
Contracts for delivery in six months moved above $80 a barrel.

Analysts say each $1 increase in the price of a barrel of oil translates into an increase of about 2.4 cents in the price of a gallon of gasoline. That means this week’s $3 increase could show up as a 7-to-8-cents-a-gallon increase at the pump by the end of next week.

The stock market reacted to rising oil prices with dismay. The Dow Jones Industrial Average fell 106.94 points Friday to close at 10,739.35. It is down 396 points since Tuesday, a drop of 3.6 percent. The blue chip indicator is now just 22 points above its starting point for the year and 903 points below its May peak.

“I don’t think you’re going to bring out a lot of buyers in the market after a week like this,” said Jay Suskind, head trader at Ryan Beck & Co. in Florham Park, N.J. “Uncertainty over the world situation is just too much for the market to have a solid up day.”

The possibility of a disruption in oil supplies is so threatening because there is little spare production capacity, said energy economist James Williams, president of WTRG Economics in London, Ark.

“We’ve got plenty of oil; we have plenty of gasoline,” he said. “But we’re short on spare oil production capacity. The industry is running at 97 percent capacity.”

That means we can’t simply switch to another source if supplies from one source are disrupted, he said. Although Israel and Lebanon are not major oil suppliers, other countries in the region are.

“This is the kind of thing that can precipitate a terrorist attack,” Williams said. He said an attack on a Saudi pipeline is the type of spillover effect that could cause disruption.

As long as tensions remain high in the Middle East, oil prices are likely to stay high at least through the end of hurricane season. However that doesn’t mean they will keep escalating sharply the way they did this week.

“We’ve reached a level where we’ve put all the scare premium into the market that we can,” said James Cordier, president of Liberty Trading in Tampa. “At this point, we have to have a disruption to move smartly higher from here.”

There’s also the possibility of a big move in the opposite direction.

“If these Middle East events somehow get resolved, prices could also drop sharply,” said energy analyst Victor Shum with Purvin & Gertz in Singapore.

Oil prices aren’t the only thing bothering the stock market. Rising interest rates around the globe have been weighing heavily on the market for the last month. While central banks are concerned about the possibility of inflation, investors have been more concerned that the higher rates will slow the economy down too much.

A national retail sales report released Friday showed signs of a slowdown. Auto sales fell and other retail sales rose less than forecast.

So what’s an investor to do? Since timing the market accurately is extremely difficult, investors with a long-term horizon are probably better off staying put.

“Our advice is to ride this out,” money manager Louis Navellier of Palm Beach told clients Friday. “While the market could make lower lows, it will begin to run out of bearish excuses in the months ahead. We expect a very strong finish in 2006 for stocks.”

Saut at Raymond James said he makes a distinction between his investment portfolio and his trading portfolio. The investment portfolio is 60 percent stocks and 40 percent cash; the trading portfolio is all cash.

Saut said he hopes stocks go down even more, creating a good buying opportunity. “Dating back to the 1930s, about every four years markets present pretty decent buy points, usually in the late summer or fall,” he said. “I’m hoping it’s going to play out that way again.”

Information from the Associated Press was used in this report.