[Peakoil] from NewYork Times Business section

[Jenny Goldie]

Higher Oil Prices Send Shares Tumbling 
By JAD MOUAWAD and VIKAS BAJAJ
Published: January 21, 2006
Stocks tumbled yesterday in their steepest slide in nearly three years, after crude oil surged past $68 a barrel and several corporate giants reported disappointing earnings. 

Stocks fell early in the day after Citigroup and General Electric reported quarterly results that fell short of expectations or failed to exceed them. The selling continued after crude oil prices advanced to a four-month high as the standoff over Iran's nuclear program and threats to Nigeria's main oil region raised fears of shortages in supplies.

The Dow Jones industrial average fell 1.96 percent yesterday, erasing its gains for the year. It was the sharpest one-day decline since May 2003. Of the 30 stocks that make up the average, 29 fell - McDonald's was the lone gainer - led by Citigroup, which fell 4.7 percent.

The Standard & Poor's 500-stock index fell 1.83 percent - its worst day since September 2003 - while the Nasdaq composite index dropped 2.35 percent, the worst since August 2004.

Even the highflying shares of Google fell 8.5 percent yesterday, their biggest decline ever, after the company said it would fight federal prosecutors' demands for records on Internet users' search queries.

For investors, who just two weeks ago were celebrating the Dow's climb above 11,000, there has been a marked shift in mood. The earlier optimism, fed by expectations that profit growth would remain strong as the Federal Reserve put the brakes on interest rate increases, has eroded in recent days. 

Market leaders like Intel and Yahoo have missed their earnings targets, and the rise in oil prices has revived concerns that higher energy costs could hold down economic growth.

At the beginning of the year, "people were more focused on the pluses," said Jeffrey Kleintop, chief investment strategist at PNC Advisors, a money management firm. "And all of a sudden we were reminded of some of the minuses today."

Crude oil futures rose 1.52 percent yesterday, settling at $68.35 a barrel on the New York Mercantile Exchange. Oil has gained 12 percent since Jan. 3, when the Iranian government said it would resume a nuclear research program suspended for 16 months.

As the standoff between Iran and Western nations drags on, the concern among oil experts is that a diplomatic or military confrontation with a major Middle East oil producer will curb oil supplies at a time when all other producers are pumping at their maximum capacity.

Unlike 2003, when Saudi Arabia and Kuwait increased their output to make up for the loss in production from Iraq after the American-led invasion, there is now little untapped production capacity left to make up for any loss of Iran's exports, which average 2.4 million barrels a day.

"It's a very powerful bull market right now," said Thomas Bentz, an oil analyst with BNP Paribas in New York. "The real concern is whether OPEC can make up for any interruptions in supplies. The problem is that we've lost our security cushion. A potential loss in Iranian oil would be impossible to replace and could send oil to $100."

In a sign of how it might use its influential position on oil markets for political ends, Iran indicated yesterday that it would seek an agreement from OPEC to cut the group's production by one million barrels a day starting in April, ostensibly to make up for a slowdown in demand in the second quarter. But analysts said the request was unlikely to be approved by other OPEC members at a time of rising uncertainty over supplies and continuing high prices. 

Samuel W. Bodman, the secretary of energy, told CNBC yesterday that he expected that OPEC would continue to supply the market adequately. Members of the Organization of the Petroleum Exporting Countries are scheduled to meet in Vienna on Jan. 31 to consider their policy for the first half of the year. 

Adding to these concerns, violence in the Niger Delta, Nigeria's main oil-producing region, has escalated in recent weeks after attacks by armed militants on major pipelines and oil platforms, forcing oil companies to cut production and evacuate some workers. 

Royal Dutch Shell has cut its output by 221,000 barrels a day, or nearly 10 percent of Nigeria's total production of 2.4 million barrels, after four oil workers were kidnapped on Jan. 11. Nigeria accounts for 3 percent of global oil production.

"Such is the momentum and rigidity in views surrounding the Iranian issue, and such is the intensity of the attacks in Nigeria that we would have to say that we believe the supply threats are credible in both cases," Barclays Capital analysts said in a note to investors yesterday. 

The analysts raised their price forecast for 2006 by $7 a barrel, to $68 a barrel to reflect "the sensitivity of the oil market to the situation in Iran, the strength of the global economy and demand for oil." 

Oil touched a high of $70.85 a barrel in August when Hurricane Katrina battered the Gulf of Mexico. The storm shut the nation's top oil producing region and briefly led to gasoline lines in some places.

The worries about oil supplies and the disappointing earnings news have got stock investors jittery, said William Gerlach, a senior portfolio manager at Gartmore Global Investments.

"You add all those things together and it creates some uncertainty in a market that has done well for the last couple of weeks," he said.

For the week, the Dow lost 2.67 percent, the S.& P. 500 was down 2.03 percent and the Nasdaq declined 2.99 percent. The Russell 2000 index closed the week down 0.54 percent.

Yesterday, investors chose to focus on disappointing statements by a few big names. Shares of General Electric fell $1.31, or 3.8 percent - its biggest one-day drop since March 2003. 

Citigroup fell $2.25, or 4.7 percent, to $45.69. Shares of other financial companies fell yesterday, including J. P. Morgan Chase, American Express and Goldman Sachs.

The latest disappointment in technology was Motorola, whose quarterly sales fell short of forecasts. Its shares fell $1.87, or 7.7 percent, to $22.48. 

Despite those prominent misses, most of the companies that have reported earnings so far, about a fifth of the Standard & Poor's 500-stock index, have either matched or exceeded Wall Street's expectations, according to John Butters, an analyst with Thomson Financial.

"When you have some of the big names lower numbers, it sets the mood for everyone," he said.
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