Crude Awakening: Add Oil to List of Worries

By Aaron L. Task Senior Writer 06/12/2003 07:19 AM EDT

Skeptics seemingly are worried about just about everything these days, be it a falling dollar, overly accommodative monetary policy, equity valuations, deficits, deflation and/or bubbles in housing and Treasuries.

Almost invariably, however, it's the things people don't worry about that gets them, which brings us to crude prices.

On Tuesday, Federal Reserve Chairman Alan Greenspan highlighted the risks of higher natural gas prices. Conversely, scant few seem terribly concerned about oil prices, Greenspan included. But those believing robust economic growth is imminent, and thus higher stock prices are justified, have reason to be at least a little concerned.

Crude futures did retreat from their prewar highs near $40 per barrel, but have risen steadily since late April and are up 13% in the past month. On Wednesday, crude futures rose another 2% to $32.36 per barrel, the highest close since March 17, after OPEC decided to leave production quotas unchanged at its meeting in Doha, Qatar.

Anticipation of OPEC keeping the status quo was but one factor pushing up oil prices recently, according to Mark Baxter, director of Southern Methodist University's Cox Maguire Energy Institute. Others include struggles getting Iraqi production back on line, concerns about possible conflict with Iran, supply glitches from Venezuela and Nigeria, and concerns about terror attacks on oil facilities.

"All that is keeping people nervous and is going to keep us around the $28-to-$35 [per barrel] range for the next six months," Baxter said.

Oil at those levels is not factored into the bullish forecast of equity strategists. "We still anticipate upside surprises because of a weaker dollar, lower energy prices and fiscal stimulus," Thomas McManus, equity portfolio strategist at Banc of America Securities, wrote on May 19 when he implored clients to "buy the dips." On Wednesday, McManus conceded crude has "moved up so much it's not as much of a positive," and that natural gas prices are "potentially a fly in the ointment."