Oil price rise affects US recovery

Analysts put $125 as ceiling at which budgets would be pinched. A $22 (Dh81) rise in the price of oil could be the difference between steady gains for US stocks and danger signs for the market. Rising US oil prices, more often than not, are a positive for the stock market — but not always. A Reuters survey of 20 equity strategists over the last two weeks puts $125 a barrel as the point where warnings start to flash for stocks. Currently, oil trades at about $103 a barrel. The $125 level is a price that would pinch consumer and corporate budgets, causing them to curtail spending sharply, and hurt key sectors of the stock market, particularly consumer, transportation and health care stocks. "Anything in the $120-$130 range puts a dampening on the economy and destroys demand," said Natalie Trunow, chief investment officer of equities at US-based Calvert Investment Management. Stocks have managed to shrug off the rise in oil prices and escalating tensions between Iran and the West, with the Standard and Poor's 500 index up 10 per cent for the year so far. Generally, stocks and oil rise together because both tend to benefit from a growing economy. A sharp, unexpected spike to unanticipated levels is needed for oil to take a real bite out of the equity market — similar to what happened in 2008, when oil peaked above $147 a barrel in July of that year. Oil more than doubled in price from January 2007 to July 2008 due to a sharp increase in Chinese demand. The hit to US consumer spending started to drag on economic growth before the financial crisis fully took hold in the United States. Outweighed by negatives That is why the recent relationship between stocks and oil has been a growing concern. Since the fall, the rolling 13-week correlation of returns between cash West Texas Intermediate crude oil and the S&P 500 index has declined, said Howard Simons, strategist at Bianco Research LLC in Chicago. It suggests the positive effect on stocks from rising oil prices is starting to be outweighed by negatives. The relationship between cash crude oil prices and US stocks has been a positive one since 1983, except for between August 2007 and July 2008, when oil prices peaked, Simons said. "The positive relationship has started to flatten out again... we could be on the cusp, if we go higher, of going into the second negative relationship we've had since 1983," he said. It is interesting that there are more industries that have a substantial positive reaction to an upward move in oil than those that react negatively. Forty industry groups in the S&P 1500 have a statistically significant negative performance beta — a measure of the volatility of an asset compared with an overall market — to crude oil prices. At the same time, 72 groups have a statistically significant positive performance, Simons' data showed, underscoring the view that rising oil prices do not usually mean a weak stock market. But if US oil hits $150 a barrel, economic growth, consumer confidence and consumption could be hit right away, and that will hurt the broader market, said Phil Orlando, senior portfolio manager at Federated Global Investment Management in New York. Sanctions by the West targeting Iran's nuclear programme have curbed oil exports from the Islamic Republic and supply could tighten further from July 1, when a ban on European insurance cover for Iranian oil takes effect. Nuclear talks Talks between Iran and world powers over Teh-ran's disputed nuclear programme resume today. If the talks succeed, it could reduce the risk premium that has lifted oil prices by 15 per cent this year. The fact that no one knows what's going to happen there "is a significant concern for me", Orlando said. Consumer discretionary and consumer staples are among sectors most negatively affected by high oil prices as people alter their spending to account for fuel costs. Household product companies like Procter and Gamble and Kimberly-Clark, soft drink makers and restaurants rank high as industries most affected. Retailers also typically lose out when energy prices surge. In the third quarter of 2008, when oil peaked, the S&P Retail index rose 2.7 per cent — and then dropped 23 per cent in the fourth quarter of that year. From:Gulfnews