Commodities plunge, roil world markets

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By Patrice Hill

A free fall in oil and other commodities sent global markets on another wild ride Wednesday, with Latin American stock indexes dropping more than 10 percent and the Dow Jones Industrial Average falling nearly 700 points before recovering somewhat to end nearly 515 points lower.

The price of premium crude oil plummeted more than $5 to below $67 a barrel after a report showed a sharp decline in U.S. demand for gasoline, diesel and other fuels in the past week. The severe credit crisis and economic slump have caused many consumers and businesses to cut back driving despite a steep fall in pump prices to well under $3 a gallon.

Diving energy stocks led U.S. stock indexes down by nearly 6 percent, with the Standard & Poor's 500 Index landing at a five-year low. But the sell-off was even more pronounced overseas. Markets in Japan, Russia, Mexico and Chile lost nearly 7 percent, and the main stock indexes in Brazil and Argentina, which are major commodity exporters, plunged more than 10 percent. Brazilian authorities had to temporarily stop trading in their tumultuous market.

A move by Argentina to nationalize 10 private pension funds also raised fears as it reminded investors of the worldwide market rout spawned by Argentina's massive debt default seven years ago. Although President Cristina Kirchner said the move was necessary to protect retiree benefits, some analysts saw it as a tactic to get hold of cash to help service Argentina's large national debt of some $150 billion.

"The oil crash hits oligarchs, dictators and Wall Street," said Martin Hutchinson, analyst at Breakingviews.com. "The price of oil has been cut in half from the peak, and could fall further. While U.S. consumers, Detroit's carmakers and airlines celebrate, there will be a raft of losers," he said, including "imprudent energy-fed regimes, alternative energy suppliers and Wall Street," where energy stocks such as Exxon Mobil and ConocoPhillips led the bull market that ended a year ago.

Commodity-rich nations that enjoyed booming demand for their exports of oil, wheat, soybeans and other staples also have met sudden calamity in the past three months as commodity prices fell precipitously from record highs reached in July. Strong growth in Brazil, Russia, Mexico, Chile and Argentina in recent years was tied to their robust exports of such raw materials. In some regimes, the abrupt reversal of fortunes is testing a shaky commitment to free markets and investors' rights.

"President Kirchner's attempt to nab private pensions still must be ratified by Congress," said Mr. Hutchinson. "But the mere attempt reinforces the insecurity of private property in Argentina. Economic reform is impossible when private assets are subject to state seizure."

Miguel Kiguel, a former finance secretary of Argentina, said the government's move changes "the rules of the game," but nevertheless could have "a positive effect because there'll be more funds to pay off debt and avoid a default." Argentina still has not resolved negotiations over a restructuring of its earlier defaulted debts to international banks.

While fears are rising that hard-pressed borrowers in developing countries like Argentina or Russia will go into default, prompting investors to flee into safe havens like U.S. Treasury bills, Standard & Poor's Corp. reported Wednesday that 65 of the 75 corporate defaults worldwide so far this year have been concentrated in the United States.

"Defaults have increased significantly in the U.S., but remain scarce elsewhere," said Diane Vazza, head of S&P's global fixed income research group, predicting that the severe stress in credit markets in the past two months will catapult the corporate default rate in the United States from 2 percent to 7.6 percent next year. The default rate in Europe, by comparison, is about 1 percent, while emerging market default rates only recently rose above zero to 0.17 percent, she said.

But the outlook is changing rapidly in the developing world. The renewed plunge in oil prices, after leveling off last week in the $70 to $75 range, raised worries among major oil producers in the Middle East, Russia and South America. Only months ago, those producers were riding an unprecedented wealth boom that enabled them to stash their mounting surpluses of oil revenues in enormous reserves and sovereign wealth funds.

Russia has been redeeming funds from its gigantic $530 billion reserve to prop up its rapidly declining economy. Russian authorities said Wednesday for the first time that they may start setting aside surplus oil in a reserve to help stabilize world crude prices.

The Organization of Petroleum Exporting Countries, which includes most of the major oil producers outside Russia, is holding an emergency meeting Friday to consider a cut in oil production of between 1 million and 2 million barrels a day to try to stem the free fall in crude prices.

"The main theme here that's driving this market into new low ground is demand deterioration," said Jim Ritterbusch, president of energy consultancy Ritterbusch and Associates. Not only is consumption of fuel plummeting in the United States and other countries in Europe and Japan that are sinking into recession, but the rapid growth of fuel use in China appears to be coming to an end as the nation's economic growth rate drops from 12 percent to between 8 percent and 9 percent in the coming year.

"It appears premature at this point" to hope for a leveling off of demand that might support oil prices, Mr. Ritterbusch said. Light, sweet crude for December delivery fell $5.43 to settle at $66.75 on the New York Mercantile Exchange, in the lowest close since June 2007.

The plunge in commodities in recent days has included gold, platinum and other precious metals that were popular earlier this year as safe-haven investments as well as hedges against inflation and a falling dollar. But a sharply rising dollar and faltering world economy have reduced that appeal. Gold prices plummeted as low as $720 an ounce Wednesday, the lowest in more than a year.

"Gold is just acting like another commodity at this point," said Tom Hartmann, a commodity analyst at Altavest Worldwide Trading Inc.