- The Washington Times - Thursday, August 26, 2004

A 11 percent drop in oil prices during the past week is cheering stock investors and boosting hopes that the threat to economic growth posed by the record-high cost of crude is fading.

The major tension spots for oil producers around the world — Iraq, Russia and Venezuela — have quieted, and consumer demand is waning with the peak summer-driving season drawing to an end.

Premium crude prices plummeted $1.74 to $43.47 a barrel in New York trading yesterday after a government report showing stable inventories of gasoline last week suggested softer-than-expected demand for driving fuels.

Meanwhile, Iraq has resumed full production from its main oil fields in the south and a long-dormant pipeline in the north, the threat of political instability in Venezuela has eased, and the Russian government has removed its obstacles to deliveries of Yukos oil.

Oil analysts say the temporary falloff in tensions means that the market might have topped — after hitting a high of more than $49 in trading on Friday.

In particular, the lack of “bad news” gives speculators who have been profiting from the sharp upward spiral in prices this summer little to pin their bets on.

“What we see is the speculative funds are a big driving force, the situation in Iraq is a big driving force,” even though oil supplies have been sufficient to meet demand, said Edmund Daukoru, Nigeria’s presidential adviser on oil.

Peter Beutel, president of Cameron Hanover Inc., an energy consultant, said many hedge funds and other speculators were expecting oil futures prices to hit $50 last week, and when that didn’t happen, they sold off, accelerating the decline in prices.

The cooling of oil prices has stoked relief on Wall Street, where economists have been warning that any jump in oil prices to more than $50 for a sustained period seriously would hurt economic growth in the United States and around the world.

The Dow Jones Industrial Average rose 83 points to 10,182, despite reports of a slackening in new-home sales.

A sense that the oil retreat might be temporary and worries that terrorists might strike during the Republican convention in New York next week or elsewhere in an attempt to influence the U.S. presidential election are holding back gains, stock analysts said.

“The fact that oil prices are falling off a bit is certainly helpful,” said David Legeay, director of portfolio management at McDonald Financial Group. But “fear that terrorism will disrupt supply is hanging over the market as a whole. Terrorism is also in play as we move forward to the election season.”

The rollback in oil prices appeared to vindicate predictions by the Federal Reserve that the extraordinary run-up in prices since March would be temporary, enabling the economy to rebound after a lull.

“I expect momentum to resume,” said Jack Guynn, president of the Fed’s Atlanta reserve bank, in a speech yesterday. “My sense is that the recent softness in the economy … is more fleeting than fixed.”

Mr. Guynn added that with an expected resumption in healthy growth, the Fed has little reason to pause in its campaign to slow growing inflation pressures, principally from high energy prices.

“A continuation of accommodative monetary policy is not appropriate as the economic expansion gains momentum and breadth,” he said. “While many of the increases associated with high prices for oil and other commodities should reverse in time, I continue to be struck by the extent of cost pass-through.

“I’m not willing to conclude that most of the price pressures we’ve seen will turn out to be transitory,” he said. “In fields where demand is strong and growing, we are seeing price increases beginning to stick.”

Mr. Guynn acknowledged that high energy prices, although they have helped stoke inflation, also have acted as a damper on consumer spending.

“Persistently high energy prices have placed an unusual burden on consumers,” but he said he expects that to reverse soon.

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