Stocks rallied this morning as rebels took control of most of Tripoli and appeared likely to end of the 42-year regime of Col. Muammar el-Qaddafi fueling hopes that a resumption of Libya’s oil production would lead to lower energy prices and boost America’s weak economy.
Investors also were looking to Federal Reserve Chairman Ben Bernanke’s Friday speech in Jackson Hole, Wyo., hoping he will announce new stimulative measures to spark growth.
After four weeks of losses, major U.S. stock indexes jumped at the opening bell but pared some of those gains as the morning wore on. Shortly before noon, the Dow Jones Industrial Average stood at 10868.28, up just over 50 points. It had peaked at 11020.55 just after 9:30 a.m. eastern time.
“We expect oil prices to fall when highly desirable, sweet Libyan crude production is fully resumed and enters the pipeline. Maybe they’re going to fall by a lot. This will come as a much-needed boost to the U.S. economy and to others in the world,” David Kotok, chairman and chief investment officer at Cumberland Advisors wrote on the Business Insider website.
“The oil price acts like a sales tax on consumption” Kotok wrote. “To clarify this relationship, we convert crude oil prices to gasoline prices and then estimate what a change in gas price will mean for the American consumer. Roughly, a penny drop in the gas price per gallon gives Americans $1.4 billion more a year to spend on other than gasoline. That is a huge stimulant to the economy.”
The price of Brent crude, the benchmark in London, slid one percent to $107 a barrel, but West Texas Intermediate, the U.S. benchmark, rose 0.7 percent to $83 on the New York Mercantile Exchange. Kotok wrote that he considers Brent to be a more reliable indicator now because excess supply in refineries at Cushing, Oklahoma, is complicating pricing in the U.S.
Oil prices on the New York Merc have already fallen from a high of nearly $115 this spring, partly in response to events in Libya, while prices for Brent remained high. “The markets showed a big wave of enthusiasm, they may have been overly optimistic,” said Phil Flynn, an energy analyst at PFGBest in Chicago. “Now they realize it’s going to take at least a couple of weeks to know when things will settle down.”
But he added that it appears that Libyan refineries have sustained only minimal damage and could be back at 70 percent of normal production “in a couple of months.” Although Libyan oil accounts for just two percent of global supply, he said it’s high quality and important to European refineries.
Despite the prospect of lower oil prices, which would reduce prices at the pump and may encourage consumers to spend, signs of uncertainty about the U.S. economy persist. The price of gold rose two percent to $1,892 an ounce. Bank stocks fell, with Bank of America down nearly six percent.
Sam Stovall, chief investment strategist at Standard & Poor's equity research, cautioned against reading too much into the stock market's gains. "It's natural in a declining market to have some days that run counter to the overall trend," he told the Associated Press. "It's normal to have a bounce back."