Oil to reappear on US investors' radar in 2005

US equity investors who recently ignored the ups and downs in oil prices may need to make a new year's resolution to get crude back in their sights.

Uncertainties due to terrorism, the weaker dollar, global economic growth, and Chinese demand likely will keep oil at current levels slightly above $40 a barrel or push it higher, analysts and traders said. So there is little chance of oil easing investor concerns by sagging back to the 2003 average of $31 a barrel, according to Wachovia Securities.

"Oil prices are important to the continuation of this rally," said Paul Mendelsohn, chief investment strategist at Windham Financial Services. "If we get a tremendous surge in oil prices next year, then it will take us back to the position in the market before November when oil was over $50."

The Dow Jones industrial average slumped to its lowest level for the year on October 25 when oil hit the $55.67 mark, its highest in the 21-year history of NYMEX trading. High oil prices curb corporate profits and consumer spending and often negatively impact stocks.

But the US stock market has risen in six of the last eight weeks since the Presidential election. And, in recent weeks, oil has not been on investors' radar screens with the market frequently trading higher in spite of a rise in oil prices and falling even as crude prices slipped.

"There is somewhat of an acceptance now that oil prices will be volatile," said Tobias Levkovich, equity strategist at Smith Barney. "If oil prices drop to $40 from $45 then the market is not going to respond that much. But if it drops to $30 or rises to $53, then it will have a meaningful impact on the market."

The ideal situation for many companies in the industrial, retail and transport sectors that have been hurt by higher fuel costs would be for oil prices to fall further. But that may not happen, analysts said.

The demand for oil as well as global growth will push oil prices higher in the long term, according to Jason Schenker, an economist at Wachovia Securities.

"Prices could rise substantially higher along with the probability of supply disruption stemming from involvement in Iraq, strikes, or terrorist interventions," Mr Schenker wrote in a report. "Furthermore, if gasoline supplies do not continue to build throughout the winter, we could still see $60 per barrel next summer."

A government report showing a drop in US commercial crude oil inventories last week, followed by news of two car bombs exploding in the Saudi Arabia capital of Riyadh, sent US oil futures soaring nearly $2 to above $43 a barrel on Wednesday. The dollar's weakness could keep upward pressure on crude. Oil-exporting nations get their revenue in dollars so as the greenback weakens against the yen and the euro, these countries have to pay more for importing food, machinery and other products from Europe and Japan.

"If the oil-exporting nations held the price of oil steady while the dollar was weakening, then they will have less and less purchasing power with respect to the rest of the world," said Bernard Wasow, an economist and senior fellow at The Century Foundation, a think tank with offices in New York and Washington, DC. US crude oil for February delivery fell 19 cents to settle at $43.45 a barrel in Thursday's shortened trading session on the New York Mercantile Exchange. The NYMEX was closed yesterday for the New Year's Day holiday.

The dollar hit an all-time low against the euro for the sixth straight session on Thursday. The euro was trading at around $1.3647 late on Thursday afternoon, after earlier climbing to a new high of $1.3667, according to Reuters data. A year ago, the euro was trading at around $1.2586.

Against Japan's yen, the dollar was down about 0.8 per cent at 102.96 yen late on Thursday afternoon in New York. A year ago, the dollar was trading at around 107 yen.