Transcripts

Stocks Slide As Oil Prices Rise

SUSIE GHARIB: Oil prices spiked more than $5 a barrel today on new supply concerns. In New York trading, July crude futures settled at $136.38, up $5.07. That surge came after the Energy Department reported that supplies of crude oil declined by almost 4.6 million barrels last week, triple what analysts had expected. As oil prices rallied, stock prices fell sharply. The Dow tumbled 205 points. The NASDAQ lost almost 55. Suzanne Pratt looks at the connection between the stock market and the oil market.

SUZANNE PRATT, NIGHTLY BUSINESS REPORT CORRESPONDENT: It seems almost counterintuitive -- oil prices are at record levels, yet oil supplies are declining. While gasoline at $4 a gallon is curbing U.S. demand, consumption in emerging markets is holding up. That's partly because many of those countries subsidize fuel purchases. As a result, there's still too much Chinese and Indian demand for oil to allow inventories any time to build up. Oil trader Randy Rothenberg predicts the oil sticker shock will continue.

RANDY ROTHENBERG, OIL TRADER, BATTALION CAPITAL MGMT: Is $150 possible? It's not out of the realm of the possible. Do I believe in that? I've been bearish at lower levels and yet I have to understand, as a global market, the supply/demand imbalance says prices have to move higher.

PRATT: While sky-high oil prices don't yet seem to be having a huge effect on global demand for energy, they are making investors nervous about the stock market. Since January, the Dow has dropped about 9 percent. In that same timeframe, oil prices have jumped more than 40 percent. While there's not exactly an inverse relationship, there is a connection. Citigroup market strategist Tobias Levkovich says there are two reasons why higher energy prices can hurt stock prices.

TOBIAS LEVKOVICH, CHIEF US STRATEGIST, CITI: One is in the form of could this be a leading indicator of inflation? At that point, interest rates go up, valuations come down. And then secondly, it affects consumption behavior. In other words, the money you would have spent in the store goes into the gas pump. And that's true across the world, but it's even more true outside the U.S.

PRATT: Levkovich thinks oil prices will decline later this year as a global economic slowdown ultimately curbs energy demand. If that happens, he predicts stocks as measured by the S&P 500, will recover some ground.

LEVKOVICH: We'd probably rally late in the year when we have more reasonable earnings expectations, because they are still too aggressive. Overall, we're looking for the market to close up modest single digits, in the 1,550 area from year-end last year. That would be up about 5 or 6 percent.

PRATT: To be sure, it's not just higher oil prices that are currently dogging stocks. Experts say investors are also battling an anemic U.S. economy, a housing market in recession and a weak U.S. dollar. Suzanne Pratt, NIGHTLY BUSINESS REPORT, New York.