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Subprime fallout pumps oil-market fears

Bob Moon Aug 6, 2007

Subprime fallout pumps oil-market fears

Bob Moon Aug 6, 2007


Kai Ryssdal: And I know what you’re gonna say. What’s the problem with falling oil prices, right?

On the face of it, nothing. But step back for just a second. What if, as was the case today, crude’s being dragged lower by worries over a weakening economy? Not so great now, is it?

Just a week ago, we were telling you about record high crude prices. Now, the oil markets are looking as jittery as stocks. Witness today’s 286-point turnaround in the Dow — the fourth straight day of triple-digit gains. Or losses.

Marketplace’s Bob Moon tells us oil traders are hoping the subprime spill-over doesn’t become a gusher.

Bob Moon: Today’s 5 percent drop in oil prices — more than $3 a barrel — was the biggest slide since December of 2004. And some analysts were blaming worries the fallout from subprime mortgage defaults could lead to Americans consuming less energy.

Brad Samples is a commodity analyst for Summit Energy Services:

Brad Samples: If their discretionary spending, disposable income — is being cut into — that means it’s spending on the margins, so that little bit extra of driving they might have done, that vacation they might have taken somewhere, all of a sudden it doesn’t look so affordable anymore. They need to sort of buckle down and keep their money for what they really need to spend it on — food items, basic expenses, heating their homes and that sort of thing.

But not everybody is so worried. Citigroup energy analyst Tim Evans believes most of today’s drop was speculators locking in their profits. He points out last week’s record-setting rally in the oil markets just happens to coincide with the recent subprime news.

Tim Evans: I think it’s more of an excuse than a reason, if you want to phrase it that way. We’re really just correcting an over-valuation in the market.

At PNC Financial Services, chief economist Stuart Hoffman agrees. He doesn’t think Federal Reserve policymakers will be convinced the economy is tanking when they meet on interest rates tomorrow. At least not enough to come to the rescue of risk-taking investors:

Stuart Hoffman: My guess is the Fed will say they continue to be still a bit more concerned about inflation, and they’re not gonna lower rates tomorrow despite all the begging and pleading from some people on Wall Street.

If anything, Hoffman says lower oil prices could reduce pricing pressures, and allow the Fed to cut interest rates a few months from now, without the fear of fueling inflation.

In New York, I’m Bob Moon for Marketplace.

Ryssdal: As Bob said, the Fed meets tomorrow. For those who like to plan ahead — you know, if nothing happens on rates this time — the next meeting’s set for the 18th of September.

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