- The Washington Times - Thursday, May 5, 2011

Oil prices plunged 10 percent to below $100 a barrel in New York on Thursday — the biggest drop since the 2008 financial crash — after a government report shook market confidence by showing a big jump in layoffs last week.

The collapse in oil prices couldn’t come at a better time for the economy and consumers — just as average gasoline prices were threatening to set records of more than $4 a gallon. The sudden drop is expected to ease pressure on pump prices in coming days.

Triggering the market crash — which affected stocks and commodities, from crude oil to silver and gold — was more evidence of diminished growth in the United States this year, caused in no small part by skyrocketing prices for fuel and food.

Layoffs have been on the rise, prompting a jump in new claims for unemployment benefits last week to an eight-month high of 474,000, the Labor Department reported Thursday.

Although temporary layoffs at Japanese-owned auto factories with parts shortages and other transitory developments likely influenced the number, jobless claims had already been on the rise to more than 400,000 in recent weeks after averaging fewer than 400,000 in the first three months of the year.

Andrew Gledhill, an economist at Moody’s Analytics, called the unemployment news “disquieting,” although he and other economists expect jobless claims to fall back to less worrisome levels of fewer than 400,000 in coming weeks.

Moody’s expects a report due Friday on April employment trends to show that job growth continued at healthy levels around 200,000 during the month.

Despite the steady job gains, “damage to the labor market over the last several years has been great,” Mr. Gledhill said. “There are 8 million unemployed workers; roughly half have been unemployed for greater than 26 weeks. … The labor market will take several years to recoup the losses suffered during the recession.”

The sobering job news had an explosive effect in commodities markets, where investors and speculators had bid up prices this year betting that more robust growth in the U.S. economy would help to send raw materials prices to record highs.

Premium crude oil prices, which had soared to more than $110 a barrel just in the last week, nose-dived Thursday by more than $10 to below $98.50 in New York trading. Other key commodities including corn, wheat and copper, which have been driving up consumer inflation, joined in the market downdraft.

The Reuters-Jefferies commodity index, a global benchmark, dropped by nearly 5 percent. Silver prices fell an additional 10 percent, adding to a 28 percent drop so far this week, the biggest for the precious metal since 1980. Silver also fell in response to strenuous anti-speculation measures imposed by U.S. regulators.

The rout in commodities fed stock market declines from Tokyo to Frankfurt. The Dow Jones industrial average fell as much as 202 points on the morning’s unemployment news, but later pared its losses to end down 139 points at 12,584 as investors surmised that the big drop in oil prices was good news for consumers and the economy.

Amid plunging markets, the U.S. dollar gained favor, surging by nearly 2 percent against the euro and rising by more than 1 percent against currencies overall.

Karl Schamotta, senior market strategist at Western Union, said the recent run-up in oil and other global commodities looked “fragile” and likely to reverse itself as investors had ignored warnings that high prices were curbing consumer demand the world over.

“The risk of a market correction was growing,” he said, noting that the Organization of

the Petroleum Exporting Countries and International Energy Agency have downgraded their forecasts for global oil demand as consumers cut back to avoid high prices.

“The surest remedy for high prices may be the high prices themselves,” Mr. Schamotta said. But investors got drunk on the “cheap liquidity” provided by the Federal Reserve and other central banks, he said, taking out big loans and setting up highly leveraged positions to profit from higher prices.

Goldman Sachs, the Wall Street firm that often leads the charge in favor of commodity investments, also warned recently that “exceptionally high” oil prices had “pushed ahead” of global demand and were due for a correction.

Despite the setbacks, analysts expect investors to keep flocking to oil and other commodities, which they see as good hedges against inflation and a declining dollar. Commodity prices have an inverse relation to the dollar, generally rising when the dollar declines and falling when the dollar rises.

The drop in oil prices this week couldn’t come too soon for U.S. consumers, who were expected to have to pay $1,200 more for gas this year than in 2009.

The average price for regular gas nationwide had surged to $3.98 this week, verging on $4, and premium gas prices are well over $5 in California and other high-priced areas.

The big drop in oil prices Thursday may be big enough to prevent pump prices from reaching records exceeding $4, some analysts said.

“I wouldn’t be surprised if we dropped to about $3.50 by the middle of June,” said Fred Rozell, retail pricing director at Oil Price Information Service.

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