- The Washington Times - Monday, August 7, 2006

NEW YORK (AP) — Near-record oil prices following an Alaskan oilfield shutdown prompted stock investors to sell because of inflation fears yesterday, one day before the Federal Reserve’s next decision on interest rates.

BP PLC said late Sunday it would shut down the Prudhoe Bay oil field, which represents 8 percent of daily U.S. crude production, to check possible pipeline corrosion. Crude oil futures surged $2.22 in response to settle at $76.98 a barrel on the New York Mercantile Exchange — near the closing record of $77.03 and a record intraday high of $77.40, both set July 14.

The stock market showed some resilience despite the higher oil prices, as many investors held out hope that the Fed would not raise rates today. Nonetheless, there were concerns that even if the Fed halts its rate increases, inflation may yet become a worry.

“Whether or not the Fed pauses in August is not as important as their plan going forward,” said Russ Koesterich, senior portfolio manager at Barclays Global Investments in San Francisco. “I don’t think the market’s going to get the kind of finality it’s looking for. The concern is, yes, they pause in August, but raise the specter of raising rates in September.”

The Dow Jones Industrial Average fell 20.97, or 0.19 percent, to 11,219.38.

Broader stock indicators also dropped. The Standard & Poor’s 500 Index lost 3.59, or 0.28 percent, to 1,275.77, and the Nasdaq Composite Index shed 12.55, or 0.6 percent, to 2,072.50.

Bonds lost ground as well in advance of the Fed meeting, with the yield on the benchmark 10-year Treasury note rising to 4.92 percent from 4.9 percent late Friday. The dollar gained against most major currencies, while gold prices also rose.

The nation’s benchmark interest rate now stands at 5.25 percent, and the Fed has raised rates by a quarter percentage point in each of its past 17 meetings dating back to June 2004.

Ever since the Fed signaled six weeks ago that the economy was growing at a slower rate, and that the Fed was taking this moderation into account in its deliberations, Wall Street has been parsing economic data and looking for signs of further slowing in the hope that the Fed would stop raising rates.

Over the past two weeks, slowing job growth and a weaker-than-expected second-quarter gross domestic product had many investors optimistic that the long-expected pause would come today. The market’s modest move lower on very light trading volume showed investors’ willingness to wait and see what the Fed will do.

The market’s optimism was evident yesterday, when stocks, despite their declines, largely stood their ground against rising oil prices.

“If you plot the S&P; 500 against oil prices for the last two to three years, they’re both rising,” said Brian Gendreau, investment strategist for ING Investment Management. “Now, certainly, if oil prices stay this high, consumer spending and earnings are going to be hurt. But for now, I think we’re hanging in there today because we’re actually enjoying some rationality.”

Shares of BP lost $2.09 to $70.45 on the Prudhoe Bay shutdown, which would take away 2.5 percent of the company’s total daily production. BP Prudhoe Bay Royalty Trust, which manages the oil field’s business on behalf of BP and others, tumbled $11.04, or 13 percent, to $76.85.

Rival oil producers saw modest gains, however, as investors believed they would benefit from the spike in oil prices. Hess Corp. rose 72 cents to $52.72, while Chevron Corp. climbed $1.17 to $66.83.

In earnings, power producer AES Corp. said its quarterly profit nearly doubled because of higher electric prices and better revenue across all its businesses. AES gained $1.82, or 10 percent, to $20.07.

Oil and gas explorer and transmitter El Paso Corp. fell 81 cents to $14.76 despite posting a profit after a year-ago loss. The company beat Wall Street’s earnings forecasts by a penny per share after one-time gains.

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