Fears that an economic slowdown in the United States could spread to other parts of the world and lead to lower energy consumption pushed oil prices down sharply for the second day on Wednesday.Skip to next paragraph
The drop in price contributed to a jump on Wall Street with the major markets all rising more than 2 percent.
The two-day decline in oil prices might signal a break in the oil price rally that began more than six years ago, although it remains unclear how far prices will fall or whether the respite is temporary.
Oil futures closed down fell $4.14 to settle at $134.60 a barrel on the New York Mercantile Exchange. That followed a $6.44 drop on Tuesday, the biggest one-day decline since 1991.
As oil dropped, the major market indexes soared. In late afternoon trading, the Dow was up 2.2 percent or more than 240 points. The broader indicators also rose just before the close. The Standard & Poor’s 500-stock index advanced 2.1 percent, to 1,241.48, and the Nasdaq rose 2.9 percent, to 2,280.74. The stock market also got a lift from a decision by Wells Fargo & Company to increase its dividend easing some investor concerns about the stability of banks.
Bond prices declined.
The fall in oil prices comes as the chairman of the Federal Reserve, Ben S. Bernanke, provided a bleak assessment of the American economy over two days of testimony before Congress. It was also ignited by fresh evidence that Americans were reducing their energy use.
A weekly report by the Energy Department showed that commercial oil inventories, which were expected to fall, rose unexpectedly on Wednesday as more oil went into storage than expected instead of being refined and sold.
Bleak economic news has been building over the last few weeks, in particular with the renewed concerns over the American banking and mortgage industry.
At the same time, some of the geopolitical tensions that surrounded the move of oil prices toward $150 a barrel also showed some signs of easing.
The Bush administration said on Tuesday that it would allow a senior diplomat to attend a meeting of European and Iranian negotiators over Iran’s nuclear program, in what would be the highest-level talks between American and Iranian representatives since 1979. Fears of a military strike by Israel or the United States on Iran’s nuclear operations helped push oil prices to record highs last week.
“Things have been looking rather glum over the past couple of days,” said John Kilduff, an energy analyst at MF Global. He called the news about talks with Iran and the unexpected increase in oil inventories “a one-two punch for bears” that could signal a deeper drop in prices in coming weeks.
Oil prices have risen more than sevenfold since 2002 as fast-growing demand in developing countries has outpaced the growth in new oil supplies. In the past year, they’ve more than doubled, pushing gasoline prices above $4 a gallon in the United States and leading to frenzied efforts in Congress to address runaway energy costs.
But as high energy prices ripple through the economy, there is growing unease at how much they are contributing to higher costs for everything from food to consumer goods. Consumer prices have risen at their fastest pace in 17 years in June, according to a government report released Wednesday.
Businesses are also being hit hard. Automakers and airlines like General Motors and Delta Airlines are losing billions of dollars and laying off thousands of employees.
Consumers have sharply reduced their gasoline consumption in the face of record prices. Gasoline demand in the United States, for example, fell 5.2 percent last week, according to a nationwide survey by MasterCard, its 12th consecutive weekly drop.
Despite the falling price of oil, gasoline is still rising. Retail gasoline, on a nationwide average, set a record at $4.11 a gallon on Wednesday, according to AAA. Diesel also touched a new high of $4.84 a gallon.
As a result of these higher prices and reduced demand, refiners are using less oil. Instead of falling as refiners draw on their inventories, oil stocks built up. Oil stocks rose 2.95 million barrels to 296.9 million barrels last week, a report by the Department of Energy showed on Wednesday. Analysts had expected inventories to drop by about 2.2 million barrels.
Most analysts expect global oil demand to slow this year and next. OPEC on Tuesday cut its forecast for the growth in oil consumption next year by 100,000 barrels a day to 900,000 barrels a day. The oil cartel suggested that prices might also ease as more supplies come on the market.
“The decline in demand for OPEC crude combined with increasing OPEC capacity should further ease market conditions and likely help moderate prices,” the report said. “Whether the market will fully benefit from the softening fundamentals will depend on other factors such as geopolitical tensions, financial markets developments and downstream constraints.”
New York Times