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Slump in Raw Material Prices Feeds Economic Concerns

As crude oil falls below $66 a barrel and other commodities also sink, Wall Street fears a worldwide slowdown.

September 12, 2006|Tom Petruno and Elizabeth Douglass | Times Staff Writers

Oil prices fell for a sixth straight session Monday, pushing crude below $66 a barrel for the first time since March, amid a broad sell-off in commodities tied in part to worries about the global economy.

Those same concerns are keeping the stock market weighed down despite the good news of cheaper energy. Major Wall Street indexes were little changed even as oil slid.

Crude futures in New York dropped 64 cents to $65.61 a barrel, the lowest since March 27. A steady decline has pulled oil down 15% from its record high of $77.03 a barrel in mid-July.

Energy traders said Monday's drop reflected robust U.S. oil inventories, diminishing fears about hurricane season and a decision by the Organization of the Petroleum Exporting Countries to keep production targets steady despite falling prices.

Sliding crude prices are pulling retail gasoline prices down as well. Nationwide, the average price for self-serve regular fell 10.9 cents over the last week to $2.618 a gallon Monday, the fifth straight weekly decline, according to the Energy Information Administration.

California's statewide average has declined for four weeks. It fell 6.1 cents in the last seven days to $2.949 a gallon -- the first time since mid-April that the average has slid under $3.

But even as consumers get a break at the pump, some analysts worry that the sharp pullback in oil and in prices of other raw materials is foretelling that the global economy will slow significantly in the next few months and in 2007.

Subodh Kumar, investment strategist at brokerage CIBC World Markets in New York, said Wall Street was shifting away from so-called cyclical bets, meaning investments that would be expected to fare well in a strong economy.

"Some of the cyclical enthusiasm is coming out of the markets," he said.

That has been evident in recent days in steep declines in commodities besides energy, including gold, copper, coffee and cotton.

Copper futures prices, for example, have dropped 7% over the last three trading sessions. The price fell 14.4 cents to $3.43 a pound in New York on Monday.

Near-term gold futures fell $19.60 to $590 an ounce, the lowest in two months.

Prices of raw materials have soared since 2002, reflecting the global economy's recovery -- and particularly the boom in China, which has soaked up enormous amounts of commodities for its infrastructure building campaign.

But some analysts say the global economy now faces two main threats: a governmentengineered slowdown in China and housing-led weakness in the U.S.

China's central bank has been draining money from the country's banking system since April in an attempt to restrain lending and brake the economy.

In the U.S., the slide in home sales and leveling of prices this year are weighing on consumer sentiment, many economists believe. The Conference Board's consumer confidence index fell in August to a nine-month low.

Stephen Roach, an economist at brokerage Morgan Stanley, said the risk of a recession in 2007 had become "significant" given his outlook for decelerating growth in China and in the U.S.

Some commodity investors and traders seem to be taking that to heart, figuring that if they don't sell out now, prices will only be much lower in a few months if the economic outlook dims.

But the pullback in commodity markets also reflects an unwinding of the speculative frenzy in many raw materials earlier this year, analysts say. Copper, for example, reached a record of nearly $4 a pound in May, up from 66 cents in September 2002.

The spring peak in copper "discounted the most bullish scenario imaginable," said William O'Neill, a veteran commodities analyst at Logic Advisors in Upper Saddle River, N.J.

Despite the cautionary signal from commodity prices, many analysts don't believe that the U.S. economy is in danger of slowing dramatically.

William Poole, president of the Federal Reserve Bank of St. Louis, said at a conference Monday that the economy "is not fragile -- it is robust." He said the emphasis on trouble in the housing sector was "a bit overdone."

That's also the view of Jerry Webman, chief economist at money management firm OppenheimerFunds in New York.

"I think the housing slowdown is way overblown as a macro factor" for the economy, Webman said. He said the weakness in housing was being partly offset by a still-low unemployment rate and by business and government spending.

Still, Kumar of CIBC World Markets said the stock market was wary. Even as oil has fallen more than $11 a barrel since August 7, the Dow Jones industrial average has gained just 1.6%.

The Dow added 4.73 points to 11,396.84 on Monday. The Standard & Poor's 500 index inched up 0.62 of a point, or less than 0.1%, to 1,299.54. The Nasdaq composite index was up 7.46 points, or 0.3%, to 2,173.25.

Losers outnumbered winners on the New York Stock Exchange and on Nasdaq, as trading volume jumped from recent low levels.

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