By Jason Simpkins
Staff Writer
Stocks tumbled yesterday (Monday) as oil prices soared and three major U.S. banks announced a plan to revive the asset-backed commercial paper market.
The Dow Jones Industrial Average fell 108.20 points, or 0.77%, to close at 13,984.80. The broader Standard & Poor's 500 Index closed at 1,548.71, down 13.09 points, or 0.84%. The tech-laden Nasdaq Composite Index fell 25.63 points, or 0.91%, to close at 2,780.05.
The market sag came amid news that three major U.S. banks would combine forces in an effort to resurrect an asset-backed commercial paper market deeply wounded by the housing slump and subsequent credit crunch.
Also dragging on the market were concerns over rising energy costs as colder weather sets in. Oil prices cracked $86 a barrel Monday, closing at $86.13, a jump of $2.44 a barrel, or nearly 3%.
Oil prices rose above an overnight record close in Asian trading today (Tuesday) to set a new high after the Turkish government yesterday (Monday) asked its parliament for permission to pursue Kurdish rebels into Iraq - stoking fears that oil supplies in the region will be disrupted.
Light, sweet crude for November delivery rose 51 cents a barrel to reach $86.64 in electronic trading on the New York Mercantile Exchange by mid-afternoon in Singapore. Indeed, prices rose by as much as 66 cents a barrel in the electronic session to a fresh trading high of $86.79 a barrel.
Oil prices of $86 a barrel or greater are at a "historically high level... Many people are looking at this level for the first time so it's very difficult to say what will happen next," Tetsu Emori, a commodity markets fund manager at ASTMAX Futures Co., in Tokyo, told The Associated Press. "All the factors in the market are bullish, there are no bearish factors except maybe that the market looks like it's been overbought, technically."
Despite the gains, oil is still below inflation-adjusted highs hit in early 1980. Depending on the adjustment, a $38 barrel of oil in 1980 would be worth $96 to $101 or more today.
Yesterday's record oil-price surge stemmed from some troubling reports from both the International Energy Association (IEA) and the Organizations of Petroleum Exporting Countries (OPEC).
OPEC said in a report yesterday that it's likely the rest of the world will produce 110,000 fewer barrels of oil per day in the fourth quarter than previously expected. It also said that at the same time, demand would grow by 100,000 barrels per day over last year.
Last week, the Energy Department reported that domestic crude inventories fell during the week of October 5, when they were supposed to increase. Also in a separate report, the IEA said that oil inventories held by the world's largest industrialized is below its five-year average.
Additionally, speculation that Turkey could enter Iraq in response to attacks by Kurdish rebels has given investors even more cause for concern.
"Oil out of northern Iraq fields has been erratic for some time," Linda Rafield told CNN, "But complete disruption would definitely be bullish for this market."
Investors were troubled by a debt deal by three major banks. Citigroup Inc. (C), Bank of America Corp. (BAC), and J.P. Morgan Chase & Co. (JPM) said yesterday that they would buy assets from structured investment vehicles (SIVs) to prevent investors from dumping their holdings. SIVs are typically bank-run, programs designed to profit from the difference between short-term borrowing rates and longer-term returns from structured product investments such as bank bonds or subprime mortgage debt.
The fund, known as the master liquidity enhancement conduit, or M-LEC, will finance the purchase of assets by selling medium-term notes and commercial paper to investors, the banks said in a joint statement. Sources familiar with the agreement told Bloomberg News the fund would be worth approximately $80 billion. The fund is expected to be fully established within the next 90 days.
The commercial paper market suffered mightily in July and August as the subprime meltdown forced investors to retreat. The amount of asset-backed commercial paper outstanding plummeted from a high of $1.14 trillion at the end of June, to $899 billion in the week ended October 10.
Treasury Secretary Harry Paulson mediated the agreement after a commercial paper market shutdown forced the sale of about $75 billion in assets. Alex Roever a debt strategist at JPMorgan told Bloomberg SIVs have at least $32 billion in assets.
News and Related Story Links:
- Money Morning Investment Analysis:
A Lackluster Inventory and Political Strife Drive Oil to a Record High. - Money Morning Investment Analysis:
Commercial Paper Continues Plunge, Pressures Mount on Fed to Cut Rates. - Bloomberg:
Citigroup, Bank of America Plan $80 Billion SIV Fund. - CNN:
Oil smashes $86 for the first time. - The Associated Press:
Oil Prices Rise Above Record Close.