As price of oil soars, stock markets slump

A rate increase by the Fed might be enough to shock the oil market, says Phil Flynn, vice president of Alaron Trading in Chicago. "I would like to see them do a surprise quarter-of-a-point rate increase," he says. "It would show they have inflation-fighting capability.... You have to break the inflation psychology now or later."

An interest-rate increase might also help stabilize the dollar, which sank further after the European Central Bank signaled last Thursday it was likely to raise interest rates to counter inflation. "Europe is not helping out. It's going its own way," Mr. Flynn says.

Last Thursday, the day after the Fed meeting, Chakib Khelil, president of the Organization of Petroleum Exporting Countries, told viewers on France 24 that the price of oil might go between $150 to $170 per barrel this summer. This gave oil prices another boost. "He might be prophetic," Flynn says.

Despite Mr. Khelil's forecasts, however, there were few new developments in the oil markets to suggest that oil prices would go higher. The US Department of Energy reported that inventories of crude oil and distillates were larger than analysts had expected. Fuel consumption fell 2.3 percent in the past four weeks compared with a year earlier.

"Demand is looking pretty weak," says Rick Mueller, director of petroleum markets for Energy Security Analysis Inc. (ESAI) in Wakefield, Mass. "That's why it's so hard to predict prices. It wouldn't be surprising to see the price of crude drop $5 a barrel on Monday."

In fact, energy analysts have been predicting lower prices for some time. In a Bloomberg news survey, energy analysts have called for falling prices in 23 of the past 24 weeks. In the latest survey, almost half of the 24 analysts surveyed predicted lower prices this week.

While the price of oil has been rising, financial stocks such as Citigroup and Lehman Brothers on Wall Street have been falling. "There is the realization we have another round of bank credit write-offs," says Dickson, who notes that a recent downgrade of some banks by Goldman Sachs's analysts "reawakened Wall Street that more write-offs are coming."

Last Friday, the prospect of more bad news prompted Moody's Investors Service to say it is reviewing Morgan Stanley, an investment banking and brokerage firm, for a possible ratings downgrade.

• Wire services were used for this report.

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