Stocks prices rallied right out of the gate yesterday, with the Dow Jones Industrial Averaging opening up 100 points from Friday's close. However, yesterday's early-morning rally faded within a couple of hours of trading (and the major stock market indices closed down for the day) after investors realized that the earlier advances were due primarily to gains in the prices of oil and gas stocks.
For example, both Chevron and Exxon (two of the Dow's 30 components) gapped up in price, as a result of a surge in crude oil prices, which in turn rose because of increasing speculation that OPEC may curb production when it meets on March 5. In fact, crude oil futures for March delivery rose on Tuesday to their highest level since the first week of January.
The renewed speculation concerning oil prices is due to recent comments from OPEC. For example, OPEC's President, Chakib Khelil, said on Feb. 13 that OPEC won't increase production at its next meeting on March 5. The oil cartel expects the worldwide demand for oil to drop by 1.8 million barrels a day during the second quarter of this year as a result of the U.S. economic slowdown, refinery shutdowns for maintenance and lower fuel consumption as the winter heating season comes to an end.
In January, Khelil hinted that OPEC might even cut production because OPEC exports were 1.5 million barrels per day above the world demand for oil.
This past weekend, Iran's oil minister also said that OPEC may soon cut oil production, because the demand for oil tends to decline after the end of the U.S. winter heating season. Meanwhile, Alon USA Energy, Inc. announced on Monday evening that an explosion and fire at its Big Spring, Texas refinery has temporarily shut down oil production at the 70,000-barrel-a-day facility.
Although the big increases in oil and gas prices during the past year had little negative impact on the financial markets, my research indicates that stock prices in general will fall sharply if energy prices continue to trend higher.
U.S. consumers are already feeling the effects of rising food prices, and any further increases in oil and gas prices will likely cause consumers to continue tightening their budgets.
Keep in mind that, on an inflation-adjusted basis, oil and gas prices are now significantly above their highs during the early 1980s when rising oil prices were largely responsible for the 1981 - 1982 recession.
So, I urge you once again to not be persuaded by the so-called Wall Street "experts" into thinking that now is a good time to add to your equity portfolio. The ongoing downturn in the housing market and rising inflationary pressures strongly suggest that more trouble is ahead for the U.S. economy and that stock prices will continue to trend lower during the months ahead.
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